Why you shouldn’t house shop based on BAH
Housing costs are the largest recurring line items on most budgets. When we try to save money we think to cut small costs - cancel the DVR, forego the US Weekly at checkout line, call Comcast and dispute your bill (my favorite). While these initiatives are well intentioned, their impacts are limited.
When you think about saving real money you have to start with the big ticket items, like housing. The military is unique in that it provides guiding figures on how much they think you should spend on housing through BAH. But, do these rates align with what you should actually be spending?
When you are making the major decision on where you will live for the next two years or indefinitely, you need to look at the total housing costs as a percentage of take-home pay. As a rule of thumb you should keep costs under 30%. Total costs include insurance, taxes, HOA dues, water, sewer, trash, gas, electric, phone and/or cell phone, cable, internet, lawn maintenance, repairs, etc. These additional costs can easily run you another $500 to +$1,000 per month. If you don't factor these in when making your housing decision odds are you will find yourself saying, “Why can’t we save any money?”
An example will help to illustrate this concept. An O-3 in Colorado Springs with 10 years of service with dependents will have monthly cash flow as follows using a 20% effective tax rate. Basic pay ($5708 x 80%) + $240 BAS + $1650 BAH = $6,456 after-tax take home pay. BAH is 26% of your take-home pay($1,650/$6,456 = 26%.) Does that mean you should rent a home for $1650 per month? Probably not.
Let’s assume you estimate $500 per month for all your bills and utilities. Apply the 30% rule to $6,456 and that leaves you with $1,936 to spend on housing. Back out the $500 to heat and light the house, have internet, phone, etc. and you now have $1436, not $1650 to spend on your rent or mortgage.
Why should you keep your costs on housing affordable? So you can not only be saving appropriately (how about opening that Roth IRA?), but so you can do fun things. We all have friends with a massive home that never go on vacation, out to dinner, or do anything that requires discretionary income. Why is this? If they aren’t the Duggars they might be paying too much for their home and didn’t take into account the monthly $300 water bill, $200 tax bill, $250 gas/electric bill, $150 phone bill, $150 cable/internet bill, $100 HOA dues, and countless repairs and upkeep.
There is a great advantage to military life in that most of us are not locked into our house payment forever. We move a lot which means we get many chances to get this right. Next time you PCS make sure to do your homework, select a home you can afford, maybe increase your savings and then have fun with your newly found discretionary income.
When you think about saving real money you have to start with the big ticket items, like housing. The military is unique in that it provides guiding figures on how much they think you should spend on housing through BAH. But, do these rates align with what you should actually be spending?
When you are making the major decision on where you will live for the next two years or indefinitely, you need to look at the total housing costs as a percentage of take-home pay. As a rule of thumb you should keep costs under 30%. Total costs include insurance, taxes, HOA dues, water, sewer, trash, gas, electric, phone and/or cell phone, cable, internet, lawn maintenance, repairs, etc. These additional costs can easily run you another $500 to +$1,000 per month. If you don't factor these in when making your housing decision odds are you will find yourself saying, “Why can’t we save any money?”
An example will help to illustrate this concept. An O-3 in Colorado Springs with 10 years of service with dependents will have monthly cash flow as follows using a 20% effective tax rate. Basic pay ($5708 x 80%) + $240 BAS + $1650 BAH = $6,456 after-tax take home pay. BAH is 26% of your take-home pay($1,650/$6,456 = 26%.) Does that mean you should rent a home for $1650 per month? Probably not.
Let’s assume you estimate $500 per month for all your bills and utilities. Apply the 30% rule to $6,456 and that leaves you with $1,936 to spend on housing. Back out the $500 to heat and light the house, have internet, phone, etc. and you now have $1436, not $1650 to spend on your rent or mortgage.
Why should you keep your costs on housing affordable? So you can not only be saving appropriately (how about opening that Roth IRA?), but so you can do fun things. We all have friends with a massive home that never go on vacation, out to dinner, or do anything that requires discretionary income. Why is this? If they aren’t the Duggars they might be paying too much for their home and didn’t take into account the monthly $300 water bill, $200 tax bill, $250 gas/electric bill, $150 phone bill, $150 cable/internet bill, $100 HOA dues, and countless repairs and upkeep.
There is a great advantage to military life in that most of us are not locked into our house payment forever. We move a lot which means we get many chances to get this right. Next time you PCS make sure to do your homework, select a home you can afford, maybe increase your savings and then have fun with your newly found discretionary income.