05-25-2015 09:15 AM
Content provided courtesy of USAA.
by JJ Montanaro, CFP®
I bet everyone in the military knows that these three letters stand for “basic allowance for housing.” It’s meant to cover the cost of your mortgage or your rent, right?
Did you notice that it’s BAH, not BAM or BAR? Even with the 2015 cuts, did you know that it’s designed to cover almost the entire cost of housing (99 percent to be exact) — which includes rent or mortgage payment plus utilities?
If you knew that, are you practicing it?
The Defense Department’s Basic Allowance for Housing breakdown outlines what your BAH should cover. So if you’re looking for properties priced right around your BAH total, you may be making a costly mistake.
Here’s how it can all go wrong. Let’s say your BAH is $1,000 a month, and you use that as your guide. You find an apartment for about $1,000. Now, you’ve used up your entire housing allowance on rent, and you haven’t even thought about utilities and renters insurance (that’s no longer part of the BAH).
If you neglected to figure those in, you could be looking at a few hundred dollars coming out of your pocket. Before you know it, living the financial golden rule — spend less than you earn while saving consistently — just got a lot harder.
If you’re buying a home and use the entire BAH to cover your mortgage payment, the odds against you are even higher. Don’t forget, now you’ll need to add property taxes and homeowners insurance. Along with utilities, homeowners also must pay for maintenance and upkeep, potential homeowner’s association dues and any costs to make the house suit your own style (repainting, window coverings, landscaping, etc.).
Blowing your entire housing allowance on the mortgage payment could lead to a budgeting disaster. If you’re overspending on housing, which is most folks’ biggest monthly outlay, it’s a lot harder to live within your means. I’m all for clipping coupons, cutting out expensive coffee and looking for bargains, but if 50% or more of your income is tied up in putting a roof over your head, you probably won’t have a lot of wiggle room for those cuts to make a difference.
So, the next time you’re in the market for housing, check the BAH guidelines for your area and use the breakdowns as your guide. If you’re getting $1,000 of BAH and rent is only supposed to be about 75% of your total allowance, shop for housing in the $750 range, not $1,000 or higher.
And even though the DOD cut renters insurance from its equation, make sure you haven’t done the same — find the money to cover it yourself.
In the long run, these choices will guide you to a better housing decision and possibly more money in the bank. And who wouldn’t want that?
Certified Financial Planner Board of Standards, Inc., owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNERTM in the U.S. which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.