Military Finance Report

Sunday, November 23, 2014

A Major Collapse is Coming


In July of 2001, I had just received my enlistment bonus and had been in the military for less than 2 years. I had $800 in Lucent stock and $500 in other stocks; totaling $1,300. I had less than $300 in an emergency savings account. Several months after the stock market had collapsed from the 9/11 attacks, my $1,300 portfolio was nearly worthless.
In 2007, I had become politically aware and more knowledgeable about the economy. Some of the political websites I followed started to discuss how bad the economy really was despite the media and the politicians saying the economy had never been better. All the data suggested the economy was perfectly fine yet some people had noticed the problems at the base. I began selling my stocks at 52-week highs. I looked foolish for several months preparing for the drop. Starting in October of 2008 the stock market began crashing, losing 18-20% in one week. By March of 2009, the major stocks indices dropped 50+%. I started buying back some of the stocks I had originally owned. Several years later I had many stocks double on me.

Now, in 2014, news articles are saying the economy has never been better and stock markets have never been higher. I believe there are significant problems at the base again. The national debt, almost $18T, Russia growing its empire and China doing the same are all world problems that soon, will impact America’s economy. Instead of worrying about a recession/depression like we’ve been doing for too long, we’ll see inflation come like a hurricane through our lives. Once the crash happens, the recovery, like always, will be on the backs of the middle-income taxpayers. The rich will come out unscathed and the poor will see little impact to them. By design, most of the people in the military are middle income and will be “punished” the most to help the economy recover. Over the past year, I’ve been preparing for the stock market to collapse and once again I look foolish, sitting on the sidelines while everyone is making money in the stock market. If you believe a crash is coming, like I do, then here are some of the investments I’m doing to prepare.

·         Emergency Savings Account: I’ve been increasing my emergency savings account. Even though I have no real debt, I believe having available cash will give me flexibility to take advantage of a stock market collapse by buying stocks at cheaper prices which have crashed with the economy but there’s nothing wrong with the company.

·         Eliminate all consumer debt: Except for a mortgage, and perhaps low-interest rate student loans, you should eliminate all consumer debt. As interest rates rise to help protect against inflation, your credit cards and other loans will also rise leaving you in a bad spot if you have limited flexibility in your paycheck.

·         Start selling stocks as they reach higher levels: If you own individual stocks or mutual funds, then sell portions of your gains as they go higher. Like me, you may look foolish when others are making money; but if they never sell, they miss the opportunity to realize those gains. If you solely invest in the Thrift Savings Plan (TSP) you can request an Interfund Transfer (IFT) and/or you can change your allocations on www.tsp.gov to “sell” out of the stocks funds and move into the “G Fund” to protect your TSP portfolio.

·         Gold: It may make sense to buy and hold gold through the collapse, but I recommend only holding gold for the initial panic. Gold has dropped from a high of $1,800 to less than $1,200 (a 30% drop). Gold will rise again when the stock market drops rapidly but if inflation rears its head, interest rates will rise and all the money currently in gold will go towards bonds to earn a “safer” rate of return. In 2003, an average high-yield savings account was earning 5% and Gold was less than $300. It may not go down that low for a long time, but it will go below $1,000. Gold will remain high as long as our national debt is at 100+% of our Gross Domestic Product (GDP), currently at 103%.

·         Dividend stocks: As the stock market collapses, many companies will offer a higher dividend yield as the stock prices fall in relation to its dividend. Some companies will be just fine and recover nicely. If you had invested in them at the bottom, then you’d have a very nice dividend yield. In his book, Getting Back to Even, Jim Cramer calls these stocks “accidental high yielders”.
If you are using different strategies or you disagree about my prediction, please let me know by leaving a comment.

Thursday, November 13, 2014

Stocks to Consider (November 2014)

I’ve made most of my returns through sound value-investing principles. Buying stocks at cheap prices because of temporary weakness, either in the company or the sector, has provided me the best returns. I’ve lost the most money by using other investing principles and ended up buying at the high point and then having to sell at a loss. In my opinion, a good value strategy in this rising market may be Solar Energy stocks.
The two companies on my watch list are First Solar (FSLR) which is the industry giant and SunPower (SPWR) Corporation which has a huge presence in the deserts of California. FSLR once hit close to $180 in Feb/Mar of 2011. As of 13 Nov, its 52-week high is at $75 and is currently trading at $48. SPWR once hit $130 in 2008 and its 52-week high is at $42 and its currently trading at $27. SPWR has been on a tremendous run since the end of 2012, being as low as $4 in November 2012, as it gains more momentum in the industry.
The Solar Energy industry was the darling of the stock market when Al Gore’s “Inconvenient Truth” swept through the world; putting alternative energy options in the spot light. Ever since then, politics have shied away from the Climate Change debate, focusing more on the struggling economy.
The alternative energy is politically dependent. As the Republicans take over the House and Senate, I imagine the industry will suffer and stock prices will go lower, providing ample opportunities for value investors. In 2011, the solar-cell company, Solyndra, filed bankruptcy after receiving a huge grant from the American Recovery and Reinvestment Act. The company was a major donor to President Obama’s presidential campaign. Once the company filed for bankruptcy, the administration dodged all implications of corruption costing the taxpayers $385 million, once/if the projected $142.8 million is recouped. The executives all received “golden parachutes.” Instead of the administration taking the hit, the solar energy industry took the blame and climate change discussions were halted.
These temporary political weaknesses may give us an attractive buying opportunity this year and into 2015. I think the industry will continue to expand with or without political support. Once the support has returned, the stocks should skyrocket. It’s also satisfying to invest in industries you feel good about. As always, be careful taking stock advice from any blogger.
DISCLOSURE: As of this writing, I’m not currently invested in FSLR or SPWR but will most likely buy soon.

Friday, October 24, 2014

Big Thrift Savings Plan (TSP) Returns


In my previous blog post titled, Active TSP participation, I recommended taking advantage of the recent market dip by changing your portfolio allocation or by doing an Interfund Transfer (IFT). In less than two weeks, you could have earned over .5% in most of the funds besides the “G” and “F Funds”. Considering that the national average for the ANNUAL return of savings accounts is less than .5% (http://www.bankrate.com/checking.aspx), then you could have made more in two weeks than all year in a typical savings account while keeping your money in your TSP accounts.

Date
L Income
L 2020
L 2030
L 2040
L 2050
G Fund
F Fund
C Fund
S Fund
I Fund
14-Oct-14
17.11
21.98
23.55
24.84
14.00
14.55
16.71
24.66
32.31
23.94
22-Oct-14
17.24
22.38
24.11
25.53
14.44
14.56
16.68
25.63
34.15
24.35
Gain/(Loss)
0.74%
1.79%
2.32%
2.72%
3.04%
0.06%
-0.20%
3.78%
5.38%
1.67%

*Data as of 23 Oct 14
You don’t have to be passive when it comes to major market swings and the Thrift Savings Plan (TSP). I understand most people want to invest and forget when they participate in the TSP. “Dollar cost averaging” or investing at regular intervals can earn you average results compared to the market; but by taking a passive approach to investing, you can achieve above average results.

Tuesday, October 14, 2014

Active Thrift Savings Plan (TSP) Participation

In the past week, the DOW Jones has dropped 1,000 points (6%). If you're like me, then you should get excited when you see quick market drops because they offer better buying opportunities. It's like your favorite pair of shoes went on sale. Even if 100% of your retirement savings is in the Thrift Savings Plan (TSP), you can still take advantage of stock market dips and rallies.

The easiest way is to log into www.tsp.gov and change the percentage you contribute to each month. The default fund is the "G Fund" which is the safest but offers the least return. It's very important to check that you don't have 100% of your retirement savings in the "G Fund"; especially if you're under 40-years old. When the stock market dips for a couple of months, you can increase the amount of money you have from each paycheck into the C, S or I Funds. When the stock market rallies, you can reduce the percentage if you're uncomfortable with the risk.

Another way of taking advantage of stock market dips and rallies is to request an Interfund Transfer (IFT). This changes the percentage of your overall portfolio by moving the selected percentage into a different fund. You can increase the percentage to the C, S, or I Funds during stock market dips. TSP has a limit to only 2 IFTs a month. You can request an IFTs by logging onto www.tsp.gov or you can call the TSP ThriftLine. (https://www.tsp.gov/planparticipation/interfundbp/IFTs.shtml)

Tuesday, October 7, 2014

Budgeting Made Easy

For most people, being on a budget feels like being on a diet. The first thing people think of when they consider a budget is restrictions. Having a budget isn’t about restricting; it’s more about knowing where your money is going and knowing where your money goes is one of the most crucial steps to financial planning. I recommend doing the 30-day spending challenge I wrote about here: 30-day Challenge to track your expenses. Creating a simple budget is easy. Here’s how I recommend starting.
1.       Income. On the left side of your excel sheet or piece of paper, list how much you make in a month. Then on the right side, list your bills.
2.      Fixed bills. Start with listing your fixed bills. These are the bills that never change regardless of how you conduct your life and/or the minimum payments on installment loans. This typically includes rent/mortgage, insurance, car and student loan payments and sewer/trash bills. Generally speaking, you have no control over these bills.
3.      Variable bills. Next, list your variable bills. These are bills where if needed, you can reduce them if you need additional money. This typically includes gas, food, cable, phone, electricity, water, etc. When people come to see in dire financial need, it’s easy to reduce fast food consumption or simply downgrade current internet and cable service freeing up additional income to get out of their predicament. Use an average or use the last month’s bill to keep track of the amount.
4.      Take your income less your fixed and variable bills. Subtract your bills from your income and see how much “discretionary” funding you have available. The amount you have left will determine how you should proceed with your budget.
5.      Credit Card debt. Always list your credit card debt as a bill last. It is important to understand the negative impact of credit cards. Depending on your financial situation, you may only be able to pay the minimum payments from your available funding. If you have more money after you pay the minimum payments, then put more towards your credit card debt to help pay it off sooner.
6.      Savings. After paying your bills and credit card debt, the rest can be put to whatever savings strategy you are pursuing.
Creating a budget is that simple. It doesn’t require complex excel knowledge, a mathematics degree or expensive apps. If you get a promotion, you can quickly see the impact so you can increase your credit card payments or your savings. If you get into financial trouble, you can start reducing how much you pay towards your credit cards or you can put more money towards your variable bills. One quick tip: Don’t round your bills. People who round their bills, miss an opportunity to focus fire on financial objective. That being said, here’s a sample budget.
Income
(Step 1)
Fixed Bills
(Step 2)
Variable Bills
(Step 3)
Income – Bills (Step 4)
Credit Cards (Step 5)
Savings
(Step 6)
$5,000
-$1,500
-$500

-$200


-$750
-$250

-$150


-$250
-$200

-$75

$5,000
-$2,500
-$950
$1,550
-$425
$1,125


Thursday, October 2, 2014

Travel Policy Changes

Starting 1 Oct 14, there will be significant changes in authorized reimbursable expenses. The Joint Federal Travel Regulation (JFTR) and Joint Travel Regulation (JTR) has been merged and the changes have been made. In my opinion, the JFTR/JTR are very complicated to read and analyze. Here's a quick update from what I can see. Full details can be found here: (http://www.defensetravel.dod.mil/site/news.cfm?ID=29).

BL: ATM Fees, CONUS laundry fees and transportation tips are now covered in the FY15 incidental rate and are no longer reimbursable.

Most customers tend to be very familiar with Appendix G of the JFTR and significant changes have been made to clarify what will be covered in the Incidental portion.

Starting 1 Nov 14, the long-term TDY rate has been significantly lowered. The reason behind significantly reducing the rates is quoted here.

"The commercial lodging industry considers stays greater than 30 days to be “extended stays” and typically offers reduced rates to ensure occupancy.  Travelers may also consider furnished apartments or similar types of lodging which are typically cheaper than room rates in commercial lodging.  Data analysis demonstrates the flat rate per diem adequately covers lodging, meals, and incidental expenses, more accurately reflecting actual costs incurred."

During times of fiscal constraints, it's important for the Department of Defense to identify cost savings but are these cost savings at the expense of travelers on mission-critical TDYs? What are your thoughts on this?

Sunday, September 21, 2014

Military Retirement Plan

A majority of the people I've helped with their finances have been military members within 5 years, or even days, from retiring. They're concerned about only receiving 50% of their basic pay and not receiving BAH or BAS anymore. Anytime is a good time to start getting your finances settled but the earlier you start in your military career the better.


If done correctly, military members can retire from working at 40 years old. Imagine not having to work at the end of a 22-year career and only being 40 years old. When military members retire, after 20 years in the military, we get 50% of our basic pay (only basic pay) and an additional 2.5% each year after. If you start at the beginning of your career, you can have enough to make up the remaining portion of your basic pay when you retire.


For example, an E-8 at 22 years makes $5,115.30 a month (in 2014). The E-8 is entitled to 55% of his or her basic pay in retirement. 50% for twenty years and 2.5% for both years after. This would be $2,813 every month for the rest of his or her life, or $33, 756 annually and if you start saving now, you can earn enough income to get paid like you did when you were in active duty. You can potentially make enough to earn what you were getting in Housing Allowance (BAH) and Food (BAS).


To make up the remaining pay the E-8 would have to save up $552K and earn 5% when he or she retires. This may seem like a lot of money to save up, but by starting your Thrift Savings Plan (TSP) right away, investing in an Individual Retirement Account (IRA), buying real estate, living within your means and keeping debt to a minimum you can easily save this much money (or near it). $552K earning 5% a year would earn you $27,624 a year.


This discussion is theoretical because you can't withdrawal those savings from your TSP and IRAs until you are 59 1/2. But the point is, starting early and saving as much as you can will put you in a prime retirement position.