Get Real: How to Build a Budget that Works

For all the talk about budgeting, saving, investing, and building wealth -- and the repeated emphasis on starting as early as you possibly can -- there isn't a whole lot of the "how-to" out there. Reading over and over again that "you need a budget" and "reduce your expenses to boost savings" starts to sound a bit hollow without some concrete methods on how to set up and live on a budget.

When you do find saving and budgeting tips, they are generally "low-hanging fruit": they are easy to achieve because they are small changes -- but that means the impact is also small. And when your budget is based on dozens of $10, $20, and $50 savings to add up to your bigger budgeting goal, it's really difficult to stay on track. If staying on budget requires you to resist going out with your squad for pizza on a Saturday, telling yourself, "it's just $10, I can make it up another day!" is an easy out.

If you want to make big gains financially and change your life, you've got to go after the fruit at the top of the tree. Not only can you reach a goal in one leap, but once you make a major commitment, you're going to stick to it. Of course every dollar counts, especially when you're starting out, but you've got to give yourself a break and enjoy life a little, eat the pizza, rent the movie on Amazon Prime, etc.

Targets of Opportunity

What is the "low-hanging fruit"? Commonly you'll read or hear advice on how to review your expenses to identify things you can cut out or eliminate from your budget. Examples include:

• Eliminate multiple subscriptions
• Brew coffee at home to take to work instead of stopping for your "Daily Dunkin'"
• Pack a lunch instead of buying your meal at the Exchange
• Stop ordering midweek meal delivery from UberEats, DoorDash, etc.

I admit that I also have written the same things -- and I will continue to believe in and pass along these tips and recommendations. (Saving $5 a day on coffee, if invested, will add up to $80,000 at the end of a 20-year career; an extra $80,000 would be dope!) You can save money doing these things, and not have to sacrifice anything in your lifestyle: you still get to watch (most of) your favorite shows, drink coffee, and eat food. In no case are you sitting in a dark room alone, feeling drowsy and sad all day, or starving yourself. And in every case you will save meaningful money. Most people will, with these basic tips:

• Save $100 a month by cutting subscriptions
• Save $100 a month ($5 a day) by skipping expensive coffee drinks
• Save $100 a month packing a lunch ($5 for home ingredients versus a $10 meal deal)
• Save $100 (single) to $300 (family of 4) a month skipping one delivery dinner per week

If you do just one of these things and cut your expenses by $100 a month AND consistently save that $100 into your brokerage and invest it in an S&P 500 index fund, over 20 years you'll earn $36,000 in investment returns and have $60,000 in your account. In 40 years, you'll have $350,000.

If you were to do all four and save $400 a month, after 20 years you'll have earned $141,000 in investment returns and have $237,000 in your account. That can grow to $1.4 million or more in 40 years. But wouldn't it be nice to have more money even sooner? Why not save more than $400?

If you could save $1,000 a month instead of $400 and follow the same investment strategy, you would be able to reach $1.5 million in just 30 years. And as you are saving and investing in a brokerage account, you retain total control of your finances instead of waiting for the IRS to "allow" you to start withdrawing retirement savings at age 59.5. This is one of the simplest paths to Financial Freedom.

Going Big: Making What Seems Impossible, Possible

The idea of saving $1,000 a month into a brokerage account (on top of the $575 you contribute to your TSP each month -- which you are doing, right?!) starts to give young service members a bit of a panic attack though. For the 65% of the military who are in the ranks of E1-E4, this equates to saving 50-75% of their after-tax take-home pay; for young officers (O1-O2) who at least have the benefit of adding Basic Allowance for Housing (BAH) to their income, this is a savings rate of about 30%. If you're an E1-E4, married, and your partner doesn't work, it's probably out of reach.

And if you were also already putting away $100-200 a month into a High Yield Savings Account (HYSA) to build an emergency fund and $100-200 a month (into another HYSA) to save up for a new car in a few years, it may seem impossible. An E1-E4 who lives in the barracks, eats in the dining facility, and only allows themselves $100 per week in spending money might barely make it. If they have a car payment, there's no chance. The only real path to success is to ditch the car, get rides from friends, and pinch every penny until you you reach your Emergency Savings Fund and New Car Fund goals. Then you can switch off those savings and start saving $1,000 a month towards your financial freedom.

Likewise, an O1 with student loans and a car payment may find it impossible. However, for them and anyone else not living in the barracks, there are more options to make major gains in your budget because you are able to manipulate the two biggest budget "levers":

1. Housing. In 2022, the average American spent 29% of their income on housing.
2. Transportation. In 2022, average transportation expenses were 15% of total income.

Why nickel-and-dime your budget to cut a $15 Netflix subscription when there are hundreds or thousands of dollars of potential savings in your housing and transportation budget? The key to making big changes -- and major gains financially -- is to stop shooting at the small targets and instead take aim at what we in the military might call "High Payoff (Financial) Targets", or HPFTs.

HPFT #1: Cars

Let's look at transportation first, since almost everyone in uniform either has a car, or will make a car their first major purchase -- and because most of you would normally choose to finance it. Here are the average costs of owning a car in the U.S.:

• Used car auto loan monthly payment: $520
• New car auto loan monthly payment: $710
• Insurance premium (per month): $133
• Gas and oil changes (per month): $260
• Maintenance and repairs (per month): $97
• Total monthly expense: $1,025 (for 2022, source: https://www.fool.com/the-ascent/research)

If you can walk or carpool to work, doing so can help you achieve $1,000 in monthly savings. And if life was that simple, you only had to make one budgeting decision and you reached your savings goal.

Since that's not totally reasonable for someone in the military who may live in barracks or a community that is miles from work (and because of irregular and unpredictable work schedules), the next best thing is to avoid financing the car. That will save you $520-710 a month, or $6,240-8,520 per year each year for the next 5-7 years. And it's actually very affordable to get a reliable used car that will cost you less than just one year's worth of car payments. $8,000 easily buys a reliable used car. Don't think that's enough? Just go to a used car marketplace like Facebook or AutoTrader right now and start searching!

Maybe $8,000 sounds like more money than you're capable of saving? Saving $8,000 can be done quickly with any paycheck: it's like a BandAid -- just rip it off and get it over with. If you got an enlistment bonus from your service, use it to buy a reliable and cheap car with cash. If you have a Career Starter Loan as a young officer, don't use part of it as a down payment: take $8,000 and pay cash.

If you don't have either of those options and have to save monthly, just wait for 4-6 months. Remember that if you have a car the average monthly expense including a loan payment is $1,025, so just walking or carpooling for 8 months will get you to your goal of $8,000 saved. But on top of that you can "juice" your savings rate to your "New Car Fund" with some extra savings each month (like $400 saved on subscriptions, coffee, and take-out) and reach your goal in 4-6 months.

The payoff of not having an auto loan and instead saving that $520-710 a month is that over the next four years you will be able to save $20,000-30,000 and buy your very first house using a low down payment VA Loan! The path to pick seems obvious: choose a car, no debt, and homeownership, and ditch the shiny new car and expensive monthly payments!

HPFT #2: Housing

Which brings us to the single biggest monthly expense for Americans: housing. Most personal finance "gurus" recommend spending 30% of your budget on housing, and that shows up in the average American's budget as $1,411 per month spent in rent. But at the Military Wealth Coach we take to heart the mission of trying to live for free (or at least as cheaply as possible!).

The single best strategy for building wealth in your 20s is a strategy called "house hacking". House hacking means that you buy a house, live in it, and rent out rooms until you have enough income from your tenants to cover your housing costs. You live rent-free. In many military communities where you can purchase a 3-bedroom "starter home" for $180,000 or less, the monthly mortgage payment is about $1,400. You can rent two rooms for $700 each and live for free. If you live in a slightly more expensive area or buy a more expensive "starter home" you may not be able to charge more per room, but you can turn a basement or bonus room into your own studio and rent out all three bedrooms and do it.

If you aren't ready or able to buy a house and "house hack," the next best option is to rent a room. I know you want to have your own space and feel like an adult because that's what I thought I deserved when I was in my 20s, too. In fact, for the first four years of my "adult" life, I rented my own place -- and spent $1,400-2,500 a month in rent. I was living paycheck-to-paycheck with zero savings mostly because of housing. Once I realized I was poor because of this, I rented a room for $500 a month for the next four years, saving $50,000 in that time. That one decision allowed me to fund a brokerage account and buy a house. My only regret is that I hadn't made the decision four years earlier.

Base Housing: A Siren's Song

One of the greatest financial dangers in the military is the promise of "easy and free" base housing, and thousands of military families choose this route each year. While those who live in base housing are paying $0 in rent, they are giving up the tax-free income of BAH. How much do they lose? In 2024 the average monthly tax-free BAH allowances in the Continental United States (CONUS) are:

• E-7: $1,448 (single) and $1,819 (with dependents)
• O-2: $1,552 (single) and $1,911 (with dependents)

In an average housing market in the typical military community (so ignore places like Hawaii, California, or Alaska), this is enough to pay the mortgage on a starter home. So long as you then move in tenants to rent rooms from you, the $1,000-1,400 or so that you collect in rent is more than enough cash flow to save and invest monthly on your way to being a millionaire in your 40s.

So long as you repeat this every 3 years when you PCS, the banks will gladly count the extra income you earned from rent (it needs to be on two consecutive years of tax returns), allowing you to continue to qualify for more loans to buy more houses. Each time you do, you can increase rent from the previous property where you no longer need to live. By the time you're 35 or 40, you should at a minimum be able to own and rent 4-5 houses and generate $10,000 a month in extra income: you will be making more money as a landlord than you will from your day job in the military!

Staying Honest

The return on "investment" of committing to the lowest budget for housing and transportation is through the roof: you change 2 things in your budget, and you can save $500-2,000 a month, maybe more. To save that kind of money from squeezing elsewhere would require you give up coffee, clothes, subscriptions, restaurants, weekend trips, holiday vacations, and more. Driving a cheap car and renting a bedroom don't change your lifestyle because you can still do what makes you happy: giving up the daily joys and fun experiences to save money results in a lame lifestyle.

The real virtue is that this makes it much easier to stick to your budget. You don't have to fight battles with yourself every single day and agonize over every single purchase. Sure, you still should not spend $8 on a Starbucks, $50 on DoorDash on a Thursday, or $200 on name-brand clothes. But if you do let yourself splurge once in a while, you don't ruin your budget. You're locked in to a 12-month lease, or you own a car outright and have no payments: those become constants, routines, habits. The next thing you know you are ticking off major financial "Ws" left and right, enjoying the lifestyle you've always had!

Bottom Line

Going for the fruit at the top of the tree that pays huge dividends is the base of budgeting success. In addition to the big savings that are locked-in and don't require daily decisions to achieve, you start to automatically become an investor. Lifestyle expenses like food and drink are just here-or-gone decisions; financing a car is a commitment to poverty as you make $6,000 in payments a year while the car loses value. You end up spending $20,000-30,000 for an $8,000 car. But when you save those payments and instead become a homeowner and "house hacker," or just rent a room and put those payments into your brokerage to buy stocks, the stuff you buy will go up in value, and eventually make you rich.

Every single millionaire I knew on Active Duty used a financial strategy based on real estate investing to build wealth and reach their status. The handful of veterans I know who were able to leave the service and not go work for someone else, aka those who achieved Financial Freedom, did so with a portfolio of cash-flowing rental properties stretched across the United States. I don't know a single millionaire or Financially Free veteran who got there by canceling their Hulu subscription.

In order to make life-changing moves with your finances, you need to target the biggest expenses in your budget, the HPFTs: housing and transportation. A winning strategy for transportation savings is a kind of "blitzkrieg": go all-in on saving as fast as possible to buy a reliable used car with cash to avoid the costly monthly loan payments. The winning strategy for saving on housing means swallowing your pride and burying your sense of entitlement for 2-5 years, living with roommates, escaping the trap of base housing, and becoming a homeowner, landlord, and eventually a Real Estate Investor.

Nothing I or my family has done to save $25 here or $10 there ever made a difference in our finances. In contrast, when we sold the nice cars that had loans, started driving economical used cars, bought our first home, and then bought several more, we went from a net worth of -$8,000 to $1.1 million in five years. We still get meals delivered and watch Hulu. This is the "Zero-to-Hero" financial plan that works, and will work for you. Challenge yourself to do even better by starting TODAY instead of waiting 5-10 years until you've put yourself in financial pain to realize what you need to do. Time is on your side.