The 2016 Basic Allowance for Housing (BAH) rates have been announced, and, as usual, there are some big increases, and some areas with big decreases, with nearly everyone else seeing a small change. Thanks to BAH rate protection, (almost) no one will lose money due to a decrease in BAH rates. But if your rate increases, your housing expenses probably aren’t going up…so what should you do with the extra money?
Whenever you have any extra money, the first three places it should be allocated are always the same.
Build An Emergency Fund: If you don’t have an emergency fund, start one. Even the smallest savings will add up. Start with a manageable amount, like $1000, before moving on to the next step. (Another common and sensible amount is how much it would cost you to fly your entire family back home in an emergency.)
Pay Off Debt: Once you have a small emergency fund, your next priority should be paying off debt. You can do the snowball method, where you pay off the smallest debt first, or the avalanche method, where you pay off the debt with the highest interest rate first. Either way, a surprise BAH increase is a great way to pay off those debts.
Build Retirement or Separation Savings: If you have your small emergency fund, and you’re debt free, be sure that you are funding your retirement and/or separation from the military accounts.
If you’ve already mastered the three basic steps of a strong financial foundation, here are some additional places to use extra BAH money for a good purpose.
If You Own
Increase Your Maintenance Savings: houses always use more money thank you expect. If you’ve been a homeowner for longer than a minute, you know this to be true. If you already have a household maintenance fund, divert your extra BAH to this account. If you don’t have a household maintenance fund, using the increased BAH to start one.
Pay Additional Towards Your Mortgage: It never hurts to make additional principal payments against your mortgage. Even if you’re only paying 3% interest, you’re not likely making 3% interest on your savings. Watching that mortgage balance go down faster is always fun, and if you can pay off your mortgage before you leave the military – bonus!!
If You Rent
Save For A Down Payment: If you think that you will someday want to buy a house, using the extra BAH to save for a down payment. When you do buy, a larger down payment will help you get the best mortgage, potentially saving you thousands of dollars. A larger down payment also helps keep payments smaller, and provides some insurance against swings in market value.
The most important part about increased BAH isn’t what you do with it. The important part is that you make a thoughtful decision about how you want to use the money. Too many people just let that extra money get absorbed into their monthly spending. Whether it is $14 or $400, put it to good use!