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
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.
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.
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.
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.
You Don’t Have to Spend it 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.