What do you do when you receive a financial windfall?
The military had a long standing tradition of offering cash bonuses for enlistments and reenlistments in hard to fill jobs. Officers with commissions often get in on the action as well, with retention pay being common for pilots and those in the medical and law fields. You may also come into some unexpected money for another reason – such as an inheritance, or winning the lottery. Whatever the reason for your extra cash, you have to decide the course of action that will benefit you the most in the long run.
What to do with an Enlistment or Reenlistment Bonus
Receive a large amount of money at one time can be overwhelming. It’s a great idea to come up with a plan before you receive the money. That way you don’t feel overwhelmed by the sudden financial windfall, or so you don’t simply blow it on something you’ll later regret!
Here are some general ideas on how you can use your enlistment or reenlistment bonus. Later in the article we’ll address a reader question asking how he should best use his reenlistment bonus.
Pay Down Debt
If your reenlistment bonus is large enough to eliminate some of your debts, you should definitely consider paying them off. In fact, using your reenlistment bonus to reduce debt is one of the best things you can do with the money. For each debt you’re able to pay off in full, you save money on interest, and free up that much more money on a monthly basis. Take for example, a credit card with a balance in the thousands that you currently pay $65 a month minimum payments on, at 17% interest. Paying off that debt gives you an immediate 17% return on investment, eliminates thousands of dollars in debt, and gives you an extra $65 per month to use for paying down other debts or for savings or entertainment.
Even if you can’t pay the debt off entirely, making a large dent in your high-interest debts will help you pay it off sooner, provided you don’t turn around and use the plastic again to fund your next vacation or large ticket purchase.
Want a way to pay off debt more quickly? Transfer your credit card balance to a 0% balance transfer credit card. You can save hundreds or thousands in interest payments.
Emergency Fund
Life happens. Being in the military means exposing yourself to risk, and not just bullets. Being in a foreign land or living far from family makes it more likely that a financial emergency will spring itself upon you at some point. Your car needs repaired, you need to fly across the country (or halfway across the world) for a family emergency, or something else unexpected happens. To prepare for these emergencies, put aside at least $1,000 per family member for unexpected expenses such as a flight home, or major car or home repairs. Here is more information on how to start an emergency fund.
Invest
Adding to your existing investments is always a good use of cash bonuses. If you don’t already have investments or a savings account of some type, a cash bonus can help you get started without dipping into money you’ve budgeted for other purposes. When you live paycheck to paycheck, it can be difficult to start an emergency fund or save for retirement. Make the decision to put all cash bonuses and unexpected income into your savings or retirement fund and it will grow faster than you expect.
Vacation Fund
Maybe you’ve been planning a dream vacation for years, and the cash bonus you’ve just received is finally enough to get you there. Provided your income is enough to cover your monthly expenses, there is really nothing wrong with using a cash bonus for something exciting and fun like a vacation or large-ticket purchase you’ve been putting off.
Reader Question: “What Should I Do With My Reenlistment Bonus?”
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, leaving $21,000.
- Pay taxes on the remaining $21,000. That should leave him with roughly $15,750.
- Pay of his zero interest loan (it is small and will soon be over 20%). That should leave him with just over $14,000.
- 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), Ally Bank, 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.
You Don’t Have to Spend Your Bonus All in One Place
It’s important to remember your cash bonus doesn’t have to be used in an all-or-nothing sort of way. If you decide to pay down debt, that doesn’t mean you can’t also use a percentage of the money to invest or put towards a vacation or other source of entertainment. A good rule of thumb for dividing up cash bonuses is to save or invest 10%, give 10% to charity, put 10% towards vacation or entertainment purposes, and then use the remainder to pay down debts if you have debt.
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Tracey says
I’m confused, isn’t the SRB bonus only paid 50% up front?? and the balance (the other 50%, after taxes of course, paid in yearly installments??)
So the payout for 28k would only be = 28k – 25% = 21k divided by 2 = 11k !!
And the $11,000 is what you get up front with the remainder 11,000 paid in installments that are as long as your contract – for instance a six year resigning would result in 11,000 divided by 6 = $1833 a year (annual bonus) for 6 years – so as far as I know IT IS NOT ALL PAID UP FRONT !! or am I missing something?
Ryan Guina says
Tracey, each branch handles enlistment bonuses, reenlistment bonuses, and officer retention bonuses differently. Some branches pay all of the enlistment bonus up front (after tech school or upon arrival at the first duty station). Most branches pay 50% of the reenlistment bonus up front, and the rest over equal installments through the duration of the reenlistment period. That said, some bonuses, including those for special ops, pilot retention pay, and some in the medical field, can be in the tens of thousands of dollars. So the math here works, depending on how large the bonus is. If you have a smaller bonus, do the math accordingly. In this case, the $28,000 was the upfront payment, followed by several years of smaller payments (yes, this was a large reenlistment bonus, and it was several years ago, before the military was doing full scale force reduction efforts!). So for a $56,000 reenlistment, the bonus would be paid out at $28,000 up front, followed by equal installments of the balance.
Joan says
If a Marine is being kick out for drug charges and he received a $20,000.00 bonus he is only 1 year into his 4 years, will he have to pay it back? Also how will they get the money from him, he’ll probably never really get a job when he is out.
Not sure if you can answer this, but if you can thanks.
Ryan Guina says
Joan, the military may require repayment for part of the bonus that was not completely paid for in terms of years of service. I recommend the Marine speak with his base legal office or personnel office for more information. Regarding how the military will collect – I don’t know. But it’s possible they could garner wages, withhold paychecks, or something else. Again, the best way to get this information is directly from the Marine Corps personnel office.
Guest says
Let’s look at this. With that amount of debt, can Phil really afford to place so much into the TSP at this time?
There are a few variables to consider for someone in a similar circumstance. With similar credit card and vehicle debt, and with a larger SRB of around 60K, in an area with a generous BAH rate around $1600 monthly, pre-approval of 150-200K mortgage, someone could set themselves up for their first mortgage in a starter home. Taking the BAH and SRB into consideration over the coming years, the principal could be paid down enough to allow worthwhie refinancing within a 3 or 4 year tour. The option that creates is maintaining ownership of the residence even in the worst case scenario of being stationed elsewhere in the country after the tour is over. That is the only option for home ownership as an enlisted service member.
With zero credit card debt, Phil could have set himself up similarly even with only a 28K SRB.