Q&A: How a Home Fits Into the Financial Puzzle

Buying & Selling a Home

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.


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It's such a great idea to plan for the bonus while you're still deployed. That way, you can take advantage of the military's Savings Deposit Program, which lets you invest up to $10,000 in an account that earns 10% per year. Interest stops accruing 90 days after you leave the combat zone, and the interest is taxable when the money is withdrawn.

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Try to keep the maximum in that account as long as it continues to earn interest, which will give you a much better return than any other short-term savings option.


Meanwhile, use $9,000 of the bonus to pay off your credit-card debt. Getting rid of those interest payments will make it easier to reach your other goals -- and having a lower balance could also improve your credit score and help you qualify for a better mortgage rate.

Then use some of the remaining money to build up your emergency fund, which can help you avoid landing in more debt if you have any unexpected expenses. Advisers generally recommend keeping at least six months of expenses in a money-market or savings account that you can access in an emergency -- or more if you can afford it, especially when you buy a home.

After the money in the military Savings Deposit Program stops earning interest, you can put some of it toward the down payment on a house.

You can buy bank or credit-union certificates of deposit or other short-term investments to match your homebuying time frame. But don't risk the money you want to spend on a house in the next few years in the stock market.


"Investing in the stock market is just for money that you won't need for at least three to five years," says Brooke Salvini, a CPA and financial adviser in San Luis Obispo, Cal.

If you take a VA loan and don't need a down payment, add some of the money to your emergency fund -- you'll probably need cash for an earnest-money deposit on the home and closing costs, and it's a good idea to have extra money for unexpected costs, because you won't have home equity to tap in emergencies.

Homeowners with VA loans can always add money to their payments to pay extra principal without penalty -- a good way to build instant equity.

Once you have a cash cushion, add some of the extra money to your retirement nest egg, investing either in your Thrift Savings Plan or a Roth IRA. Since part of your income for the year was from tax-free combat pay, the Roth will give you extra tax benefits -- making the money tax-free going in and tax-free coming out.


You can invest long-term money in a diversified portfolio of stock and bond funds. Or you can put it in a target date fund, which invests your money in a portfolio of funds to match your time frame, then gradually shifts to more conservative investments as your withdrawal date gets closer.

If you're worried about timing your investments during a volatile market, consider using dollar-cost averaging to invest a portion of the extra money with each paycheck; dollar-cost averaging buys more shares when prices are low and fewer when they're high.

Or you could break your investments into three sections and invest one-third of the bonus money every six months, a strategy that Dan Joss, a certified financial planner in Fairfax, Va., calls "diversifying by time." Joss's reasoning: You won't know whether stock prices have bottomed until sometime after the fact, so hedge your bets.