Deployed solider: How should I use my $78k re-enlistment bonus?

Chris asks: Both my wife and I are in the military. I am currently deployed and will be re-enlisting for another four years of service. My career field receives a bonus for re-enlisting which will be about $78,000. I’ll get half up front, and the rest in annual installments over the next four years (all of which is tax-free because I am in a tax free warzone). We were planning on buying a new vehicle when I returned, but other than that have no plans for the money. We know we want to save for our future (retirement) but don’t know where to start.

Chris: Thank you to you and your wife for your selfless service to our country.

Your financial details: You mentioned that you have one child, less than $500 credit card debt, two paid off cars, a mortgage, and some cash in checking accounts, but no real savings plan. The good news is, apart from the savings/investing for retirement aspect, it sounds like your finances are in good shape. It’s great you have no car payments and little credit card debt.

Before we get to your re-enlistment bonus, let’s talk about the money you already have.

You mentioned you have a joint savings account with about $7k, which sounds like the start of a great emergency fund. My first question would be: Are you making automatic contributions to it? Figure out your total monthly expenses and aim to have about six times that number saved up in that emergency fund. (Some people save even more, but your military jobs should be fairly secure. If, for example you or your wife anticipated leaving the military and finding a civilian job, it might be a good time to have a little extra tucked away).

Whatever your ultimate emergency savings goal, figure out what you can afford monthly and contribute that much until you’ve reached your number.

Now, let’s talk about that re-enlistment bonus.

• Your plans to pay cash for a new car sound fine. That’s way better than financing one.
• Next, I’d knock off that credit card debt, however small. Why bother keeping it around?
• With what’s left over of the initial distribution, make a choice:
• Use it to top-off your emergency fund
• Or start retirement and education accounts

Either way, once you have funded your emergency fund equal to six months, it’s time to look at two goals:

• Your retirement and
• Your child’s education

You and your wife are fortunate as you will have military retirement benefits, but don’t count on that being enough. I would recommend opening a Roth IRA and investing as much as you can, up to the annual $5,000 maximum, every year. The beauty of these accounts is that after you retire, qualifying distributions are tax-free. Since you’re eligible to bank with USAA, I’d check out their Roth IRA options or talk to somebody there about getting started.

Next up, you must decide if you want to save for your child’s college education. You’ll probably want to choose from two options: a 529 savings plan or Coverdell Education Savings Account. Again, check out USAA’s Education Savings programs.

When choosing investments, I recommend exchange-traded index funds or no-load mutual funds (ask the investment company you choose for some names).

This answer isn’t going to substitute for a financial planner taking a detailed look at your finances and making qualified recommendations, but I hope it gives you a foundation to start with. It sounds like you already know the right direction to go in! Congrats on your bonus, and thank you again for your service. Be safe!