Lots of active duty service members receive an Overseas Cost of Living Allowance (COLA), designed to partially offset the high cost of living in some overseas locations. The COLA is based on a baseline calculation of the difference in costs, and then adjusted as often as twice a month to reflect changes in the exchange rate between the US dollar and the local currency. (COLA is one of the only allowances that is calculated on a half-month basis.)
Servicemembers in Europe have probably noticed that their paychecks have been significantly smaller the last few months, and the fluctuating Euro to dollar exchange rate is to blame. The COLA calculations include a wide variety of information, including estimated disposable income, spending paatterns, and the exchange rate. As the US dollar strengthens against the Euro, COLA amounts go down. Even a relatively small change in the value of the dollar can result in fairly large changes in COLA.
Over the last six months, in Europe has dropped between 10 and 20%. For an E7 with three dependents in Naples, Italy, it has fallen from $548 to $486 for a half-month. For an O3 with two dependents in Ramstein, Germany, it has gone from $465 to $417 for a half-month. The idea is that with the stronger dollar, you should come out even. It can still be a bit shock when you get that deposit or check your LES!
With economic uncertainties in the US and abroad, it is reasonable to be prepared for fluctuations in COLA. If you receive COLA, figure out what would work for your family so that you don't get stuck if the amount changes a lot.
Not sure what amount of COLA that you receive? Check out the COLA Calculator.
There's also lots of great information in this COLA Frequently Asked Questions page.
