Q&A: How a Home Fits Into the Financial Puzzle
Kim Lankford advises on how to use a military bonus toward a new home.
Q: I am currently serving in Iraq and will be coming home soon. I recently reenlisted in the Army and received a bonus of $29,000, and I have extra money from my tax-free income and combat pay while deployed. Where is a good place for the money?
I'm paying 7.9% in interest on a $9,000 credit-card balance, but my main goal is to support an upcoming down payment for a home and long-term investments.
It's such a great idea toplan for the bonus whileyou're still deployed. Thatway, you can take advantageof the military'sSavings Deposit Program,which lets you invest up to$10,000 in an account thatearns 10% per year. Intereststops accruing 90 daysafter you leave the combatzone, and the interest istaxable when the money iswithdrawn.
Try to keep the maximumin that account aslong as it continues to earninterest, which will give youa much better return thanany other short-term savingsoption.
Meanwhile, use $9,000of the bonus to pay offyour credit-card debt.Getting rid of those interestpayments will make iteasier to reach your othergoals -- and having a lowerbalance could also improveyour credit score and helpyou qualify for a bettermortgage rate.
Then use some of theremaining money to buildup your emergency fund,which can help you avoidlanding in more debt ifyou have any unexpectedexpenses. Advisers generallyrecommend keepingat least six months of expensesin a money-marketor savings account that youcan access in an emergency -- or more if you canafford it, especially whenyou buy a home.
After the money in themilitary Savings DepositProgram stops earninginterest, you can put someof it toward the down paymenton a house.
You can buy bank or credit-unioncertificates of deposit orother short-term investmentsto match your homebuyingtime frame. Butdon't risk the money youwant to spend on a housein the next few years in thestock market.
"Investing inthe stock market is just formoney that you won't needfor at least three to fiveyears," says Brooke Salvini,a CPA and financial adviserin San Luis Obispo, Cal.
If you take a VA loanand don't need a downpayment, add some of themoney to your emergencyfund -- you'll probably needcash for an earnest-moneydeposit on the home andclosing costs, and it's agood idea to have extramoney for unexpectedcosts, because you won'thave home equity to tap inemergencies.
Homeowners with VA loans can alwaysadd money to their paymentsto pay extra principalwithout penalty -- agood way to build instantequity.
Once you have a cashcushion, add some of theextra money to your retirementnest egg, investingeither in your Thrift SavingsPlan or a Roth IRA. Sincepart of your income forthe year was from tax-freecombat pay, the Roth willgive you extra tax benefits -- making the moneytax-free going in and tax-freecoming out.
You can invest long-term money ina diversified portfolio ofstock and bond funds. Oryou can put it in a target datefund, which investsyour money in a portfolioof funds to match yourtime frame, then graduallyshifts to more conservativeinvestments as your withdrawaldate gets closer.
If you're worried abouttiming your investmentsduring a volatile market,consider using dollar-costaveraging to invest a portionof the extra moneywith each paycheck; dollar-costaveraging buys moreshares when prices are lowand fewer when they'rehigh.
Or you could breakyour investments intothree sections and investone-third of the bonusmoney every six months,a strategy that Dan Joss, acertified financial plannerin Fairfax, Va., calls "diversifyingby time." Joss'sreasoning: You won't knowwhether stock prices havebottomed until sometimeafter the fact, so hedgeyour bets.