Military Finance Report

Tuesday, August 18, 2015

It Takes Money to Make Money


You’ve probably heard the phrase; It takes money to make money. Have you ever wondered what that actually meant? Let’s take a look at different aspects of life and how this phrase applies. Also, I’ll provide tips on how to navigate through this so you can make money without having a lot of money.

  • Young Adult Head Start: When parents buy or provide their children a car at a young age, they are giving them access to get a job. By having a job, the children can save and invest the money at a younger age giving them more money to make money. Also, when parents pay for college, their children are able to make more money quicker, be promoted faster, and be insulated better against long periods of unemployment.
    • My parents weren’t able to buy me a car or pay for college. I joined the Air Force and was able to acquire them myself. I was 19 when I bought my first car and didn’t receive my degree until I was 26. Someone who had a car at 16 and graduated college at 22 had much more time to save and invest than I did.
    • Advice: Help your child work and save for a car so they can start working at an earlier age; doing the same for college yields exponential dividends for your children. There’s not a lot you can do if your parents couldn’t afford these for you except to make it right for your children.
  • Debt: People who have a lot of money tend to avoid debt. Having a lot of debt means you’ll continuously have less money and it’s a negative feedback loop that is hard to get out of. People without money need more money but money is more expensive when you’re in debt.
    • Advice: Reduce and/or eliminate your consumer debt now (credit cards and small loans)
  • Credit Scores: You need a good credit score to be issued credit but you can’t get a good credit score until you can get credit. This is a double-edged standard many people face. Typically, it takes having money to sustain a good credit score. A good credit score is extremely important because it saves you from 1) having to put large deposits on common utilities 2) makes college, car and house loans cheaper which means you can save more money and 3) keeps credit card interest rates low so if you do run into financial trouble you won’t get buried quickly.
    • Advice: If you have children, then establish teen credit accounts. Starting early is essential is important because each loan you take out will save you money with a good credit score. If your credit is in shambles then repairing it should be the first thing you start working towards after you establish an emergency savings account.
  • Fees: For bank and brokerage accounts, the more money you have, the less you have to pay in fees. Minimum account balance fees will eat away at your savings. It’s better not to invest your money, avoid the fees, and then wait until you have the minimum account balance. People who don’t make a lot of money are forced to take out $20 at a time from the bank and pay ATM fees each time. A $2 ATM fee on a $20 withdrawal is the same as a 10% loss to your savings. Also, people with money usually don’t worry about Overdraft fees. Some banks charge $29 regardless of the overdrawn amount. If you overdrew your account by $1 and have to pay $29, then you theoretically suffered a 2,900% loss.
    • When I started my first bank account, I was getting charged $8 a month for not having direct deposit to my checkings and $3 a month for not having the required minimum balance in my savings account. $11 a month in fees is a lot of money for an E-3. This was before internet banking really took off so reconciling accounts was difficult.
    • Advice: Check your bank and brokerage accounts right now and make sure you’re not being charged any fees. During the financial collapse of 2008, banks had to restructure their accounts to regain confidence with the public. A benefit to customers was a serious reduction in normal fees. If you’re being charged fees, then you need to switch bank accounts or stop whatever action is causing those fees. For example, USAA doesn’t charge an ATM fee and will reimburse up to $15 a month for ATM machine fees.
  • Investments: This is the simple “Time Value of Money” principle. The more money you have to invest now will be worth more in the future. Mathematically, if you’re over 30 without $100K saved up in non-pension/military retirement accounts, then you’re seriously jeopardizing your retirement goals. People who have more money to invest earlier get to reap the benefits of compounding returns.
    • Advice: Start investing now in an IRA and/or your TSP/401(k).

Having money means you can make more money and so on. If you’re flat broke, then it’s time to start moving. It takes money to make money is just a parable form of the math behind investing early.

Tuesday, August 4, 2015

Betterment Review


I started an account with Betterment today. From what I can tell this is a perfect way for many of us to invest and I’m recommending people try it.

Click here to set up your own account.

The User Interface is really simple and offers a service that I appreciate the most in the investing world yet it’s so rare: Transparency! Your summary page shows you all the necessary details to track how much you’ve invested, how much you’ve earned and how much the fees cost.

It’s basically an automated system investing in low cost Exchange Traded Funds (ETFs).  As the website says, “Through diversification, automated rebalancing, better behavior, and lower fees, Betterment customers can expect 4.30% higher returns than a typical DIY investor.”

This speaks to me personally because I have not been able to excel in investing by doing it myself. Last year I decided to reassess my investing style and move towards Index Funds and this Betterment account should help me reach my goals faster than what I’ve been able to do.

If you’re interested in setting up a Betterment account, please click here to participate in their referral program where you and I both get 30 days free account usage (no fees).

Wednesday, July 15, 2015

Dual Military BAH Cut


In the Senate’s National Defense Authorization Act (NDAA) for Fiscal Year (FY16), the Senate Armed Forces Committee is seeking to cut dual-military married couples’ Basic Allowance for Housing (BAH). The purpose of this blog post isn’t to discuss whether this cut is good for our military members who are already facing unique financial issues or whether the politicians and senior Defense leaders continue to choose taking risk to save money with their personnel instead of focusing on large fraud/waste procurements and programs. For a complete breakdown of the impact of this measure, please read this amazing story by the US Naval Institute.
The purpose of this blogpost is to help dual-military married couples prepare for the potential cut. To date my single most popular blogpost is when I helped prepare military members for the FY15 Reduction in Force (RIF) and I hope this blog post helps others as well.

The Proposed Cut
Currently, dual-military married couples without children both receive the “without dependent” BAH rate. For the dual-military married couples with children, the higher ranking members receive with “with dependent” BAH rate and the lower-ranking receives the “without dependent” BAH rate.

The proposed cut allows the couple to receive only one BAH rate. The highest ranking will receive “with dependent” rate regardless if they have children or not. Mathematically, this is unfairly attacking dual-military married couples because if each military member married a civilian, then both members would be receiving the “with dependent” rate. These dual-military married couples were actually saving the military money.
Prepare Now

Dual-military married couples should prepare now by taking the following steps; instead of burying their head in the ground and praying this cut doesn’t happen, like many military members did during the RIF cuts.

1.      Assess your current situation – Can you afford this cut if it were to happen right now? The Senate Armed Forces Committee called this entitlement a “windfall” of money without considering all expenses dual-military married couples go through on a day-to-day basis. Would this reduce the money you currently save or would this cause a shortfall in your finances?

2.      Start looking at the market now – If this cut happens in FY16 and you are forced to leave your current place, start looking at the market now. Some states (like Louisiana) have strict zoning restrictions which prevent kids from attending schools outside the current zone. Will your kids be impacted now if you can’t afford your current market?

3.      Create a soft landing – Deviate slightly from your current financial goals by saving as if this was actually going to happen. You may have to save for the initial deposit or to pay for the difference in rent or mortgage you wouldn’t be able to cover if the cut happens. Either way, starting or increasing your emergency savings account is a great idea.

If you read the US Naval Institute’s article, it describes in-depth examination described this cut as “regressive, discriminatory and costly.” The best thing to do is to prepare now so you aren’t caught by surprise if this cut makes it into the FY16 NDAA.

Monday, July 6, 2015

Ready to Become a Military Millionaire


Most of my blog posts are written for people just starting out on their path to financial independence. I focus on that demographic because I feel most people in the military that may read my blog are probably just starting or have a surface-level knowledge base of personal finances. This blog post however, is for people already financially secure and who are ready to turn it up a notch. This post is for those aspiring to become military millionaires.

  • Ditch the “all cash” emergency savings. This first step is in direct contradiction with what I tell 95% of the people I help. I always recommend people have easy access to cash for emergencies. An emergency savings account is extremely important for people just starting out because it will shield them from unexpected expenses that may derail their financial success. Having an “all cash” emergency savings account isn’t as important for those that are higher ranking, have almost no real debt and have excellent credit. For these people, they should invest their money in conservative to moderate-conservative investments. For me, it takes less than 3 days to sell mutual funds and transfer the cash. Right now, I have cash only in my short-term goal account and it only earns a .75% interest rate (that’s less than 1%). People looking to become wealthy need to maximize their returns at all times and having a significant cash withhold can hamper those returns.
  • Debt is not a bad thing. Think big. For people with low financial knowledge and for the majority of America, debt is the new slavery. We are enslaved to consumerism and the banks own all of our debt. We have no assets to claim for that debt; i.e. college loans and credit cards. This is simply our slavery to banks and insurance companies. For people with high financial knowledge, debt is simply a tool. They have assets to claim for that debt and ensure they always have equity in that debt. Real estate, smart auto purchases, margin investment accounts and business loans are types of leverage where people earn more money than it costs to owe the money. For example, purchasing a home creates a large “debt” but is also a large “asset.” In the military, if we don’t invest our BAH, then we lose it. Going into “debt” with a home loan allows us to reap the BAH benefit. I spend most of my time helping people dig their way out of consumer debt and I wish I could spend more time helping people with their leverage.
  • Promote, save, retire, work, save and retire. This is a model most people in the military talk about but rarely execute correctly. Whether you enlisted or commissioned right away, the goal is to promote quickly. For commissioned officers, you need to complete all the things you have control over; right positions, professional certifications, Master’s degree and PME. For enlisted, study for each rank and focus on making the next rank. I made E-4 early, E-5 first time but then took 4 times to make E-6 before crossing over to the dark side in becoming a commissioned officer. This represents a large loss of income as I tried to focus on my degree. While in the military you should save as much as you can in your IRAs, TSPs, real estate and taxable accounts. Then when you retire from the military, some people as early as 37/38, get another job, save all your money and retire from that job; again, some people as early as 45-55. It doesn’t matter if you transition to civil service or corporate life. A lot of people don’t calculate their military retirement correctly and then find out they don’t have sufficient money to actually retire. Remember, our military retirement is only 50-75% of our base pay and doesn’t include COLA, BAH or BAS. For my current location, my retirement would only be 35% of my current paycheck.
  • Get another job. Even with excellent investment returns our pay doesn’t make it easy to become a millionaire in 20-30 years. After raising a family and normal expenses, we simply don’t make enough to put away a million dollars. Most people get another job or position their spouse to launch a successful company. I know friends who’ve opened their own business and after years of hard work have eclipsed their own military paychecks making retiring from the military an easy transition.

Unless you’re in an excellent financial position, I wouldn’t follow this advice. For most people, following “vanilla” advice will help secure a good financial position. This blog post is for people ready to invest and have the ability to position them to become military millionaires.  

Wednesday, June 24, 2015

Being Fearful When Others Are Greedy, Moving Into The G Fund


Warren Buffett once said, “Be FearFul When Others Are Greedy and Greedy When Others Are Fearful.” With the stock market hitting all-time highs...I’m fearful.

In November of 1999, the NASDAQ (major index tracking mostly technology stocks) hit an all-time high of 4,303 during the “dot.com” bubble. Now in June of 2015, the NASDAQ is sitting at 5,160 jumping from a bottom of 1,476 in November 2008. While most people are encouraged by this upward movement, I am fearful.

Military members and federal government employees can take advantage of the Thrift Savings Plan (TSP) which allows them to invest in specific funds in a 401(k) like program. When an investor contributes to the TSP it automatically invests in the “G” Fund which invests in Government Securities. It’s the safest fund yet offers very little returns. Since 2008, I’ve been advising people to move their money out of the “G” Fund to take advantage of returns after the financial collapse in 2008. For most people I’ve recommended not being in the “G” Fund at all. That advice was spot on for those that listened. For those that kept their money in the “G” Fund, their portfolios have barely moved.

For nearly 7 years, we’ve enjoyed a stock market rally fueled by historically low interest rates and two administrations (Bush and Obama) with uncontrollable government spending. Both of these have artificially pumped cash into the pockets of corporations and the people who, then in turn, spend it quickly. With our National Debt over $18T, these low interest rates and government spending can’t last forever. Despite gas prices going lower, all others commodities in our lives have seen price increases. As I joked in a Facebook post, “Inflation is coming”; borrowing the ominous warning from Game of Thrones.

I believe there will be a stock market drop soon. I believe Thrift Savings Plan (TSP) investors should consider moving money back into the “G” Fund to protect against major market drops. Each investor is different, but if the investor is under 30 then they should consider putting about 10-15% in the G Fund. If the investor is 31-45, then I recommend 15-35% in the “G” Fund. Anyone over 45 should very carefully analyze their current financial position and evaluate retirement goals before deciding on how much to put in the “G” Fund. If the retirement goal is to retire at 55, then there should be a larger percentage in the “G” Fund and if the retirement goal is later, then less in the “G” Fund. Retirees should be careful not to take all their money out of the stock market though with average life spans reaching 85 years old—they’ll need to make their money last better. As interest rates rise to fight inflation, investors will see increased returns in the “G” Fund as well.

Investors can either go to MyPay or change their allocation to start moving money into the “G” Fund or they can use one of their two a month Interfund Transfers (IFT) to move money out of one fund and into another. They can do this through www.tsp.gov. Please do your own research before making any investment decisions, but I really feel that this 7-year long rally is about to end.

Tuesday, June 2, 2015

The Real Debate about Raising the Federal Minimum Wage


In July 2009, the federal minimum wage was increased to $7.25 from $6.55.[1] In his 2015 State of the Union, President Obama called on Congress to raise the minimum wage.[2] The minimum wage debate has caused protests and, like all topics, is hard split by the two parties. Most of the debate revolved around raising the federal minimum wage to $15 from $7.25. This is more than doubling the previous wage increase in just six years. The intent of this blog is not to discuss politics but to address personal finance concerns. So this blog post won’t be discussing whether we should or should not increase the minimum wage; but rather, it will focus on what you can learn from what the true debate should be on.

If you’re mathematically or economically inclined, then your first question should or probably is why isn’t $7.25 enough anymore? What’s changed from 2009 to 2015 requiring an increase of over 100%? The real answer and one of the biggest problems in our economy is the damaging impact of inflation. The debate isn’t centered on reducing the cost of Consumer Prices though; it’s simply based on increasing the wage.

If you just analyze simple inflation, using the Consumer Price Index from 2009-2015, then $7.25 is equal to $8 in today’s dollars.[3] So why is the current administration and federal minimum wage supporters asking for $15 instead of $8? The answer and another problem in our country is way we handle of our current income (regardless of what we’re currently making).

  • Inflation: Every adult has experienced inflation in almost every commodity. College tuition, health care costs, movie prices, gas, food, utilities, etc. Most of us aren’t seeing our income keep pace with this inflation either. So even in times of low Consumer Price Index (which doesn’t capture all commodities) increases, inflation is still outpacing our incomes. To protect yourself, you need to start saving money for your short-to-long term goals, retirement and long-term health care costs. The economic principles of time value of money and compounding interest relies on timing to help protect you against inflation. The sooner you start saving, the better protected you’ll be against inflation.
  • Handling of our current income: One of the main reasons that people want it increased to $15 versus the inflation adjusted $8 is because we don’t know how to handle our current income. People can become financially independent by making $8 an hour or by making $200 an hour. Conversely, people can be in extreme debt and financial ruin while making $15 an hour or $200 an hour. There is too much focus on how much we make and not what we’re doing with the money we’re currently making. When I help people with their finances, the first thing I do is track expenses. By raising the minimum wage to $15 we’re not solving the problem of helping people financially. To help protect yourself, you need to track your expenses and maximize the income you currently earn. I’ve always recommended to people that before you seek and pay for professional financial guidance, you need to track all expenses for 30 days. About 60% of people I’ve dealt with quickly saw where they could make life changes without earning more income.

So regardless of whether you oppose or support a federal minimum wage increase, you can still implement changes in your life to protect yourself from the real problem.


[1] http://www.dol.gov/whd/minwage/chart.htm
[2] https://www.whitehouse.gov/the-press-office/2015/01/20/remarks-president-state-union-address-january-20-2015
[3] http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2015

Wednesday, May 6, 2015

How do People on Welfare Afford Luxuries?


A reader asked me to write a blog post about how people on social programs afford luxuries that as an E6, first-line supervisor, he couldn’t afford. He was obviously frustrated at something he saw recently, but I know exactly what he’s referring to. I went on leave last year back to my hometown in California; north of Los Angeles. I was at the only shopping market we have in town and a woman in front of me paid for her groceries with an EBT card (a social program) while answering her iPhone6 and her nice clothes and then left in her nice, new car. How can someone afford these luxuries and be on social programs? As I’m writing this blog post, I, a prior-enlisted Captain in the Air Force, currently only own an iPhone5s and desperately long for the newest iPhone.
The majority of this discussion will obviously be on the people abusing the program which garners the most attention. Economically speaking, it’s imperative for a country to have a solid social safety net to encourage entrepreneurship, risk taking, and to take care of those with disabilities. Unfortunately, many states in America, like California, have let the social programs get out of control and have created and perpetuated a negative feedback loop that keeps poor people poor. The political reason for this is not the subject of this post. Rather, instead of worrying about taking this ability away from people abusing social programs, I plan to give you ways to mimic this behavior if you need to and provide a caution.

So how do they afford these luxuries? It’s because the social programs pay for most of the “needs” of the household leaving any additional income from the social programs or from side/part-time jobs as disposable income. Most of us don’t have that option because after bills, reducing and eliminating debt and saving for retirement, we have little disposable income left.
Here’s an example of what I’m talking about.

·         Housing - A person living near Los Angeles, CA can get a near-free apartment through Section 8, HUD rental vouchers. If the person is working they only have to pay the difference between the rent and the voucher. It was difficult for me to get the benefit amount but in Fiscal Year 2012, a family of four could get a 2 bedroom apartment voucher for up to $1,447 a month. A person doesn’t necessarily “make” money on this program since it goes directly to rent. Most utilities are paid for under this program. (http://www.huduser.org/portal/datasets/fmr/fmr2012f/FY2012F_SCHEDULE%20B_922.pdf).

·         Food - The federal government estimates that we spend nearly 30% of our income on food and someone receiving Supplemental Nutrition Assistance Program (SNAP) benefits using his Electronic Benefits Transfer (EBT) card could earn up to $649 a month. (http://www.fns.usda.gov/snap/how-much-could-i-receive). Using the government’s calculation of $649 a month on food, for a family of four, this person would be “making” $2,100 a month.

·         Income – Every state administers its welfare program differently. I used California’s CalWORKS program and used the conservative estimate for Region 2 (basically not the expensive parts) and for a family of four could earn $725 a month in income. http://ca.db101.org/ca/programs/income_support/calworks/program2b.htm Since food and housing is paid for, most of this welfare is pure disposable income. Most military members don’t have $700 a month in disposable income.

 
My AT&T bill is $50 for an iPhone5s data plan a month which would easily fit into a disposable monthly budget of $700. Phone companies allow you to split the costs of phones across 12 months so people with pure disposable income can afford expensive phones. A car payment can be less than $250 a month still within the disposable income limits. If the person gets a part-time job they can extend the amount of time they’re on these benefits but their program benefits decrease.
Like I said, the purpose of this blog is to show you how to increase your disposable income. Assuming your income can’t be changed at this moment (but should always be your primary goal), you can reduce your expenses. Many people are ditching their expensive television plans for internet streaming services like NetFlix and Hulu. Paying down credit card bills and paying off other debts is a very quick way to increase disposable income. Find ways to cut on gas and transportation costs. Stop eating out so much (full disclosure: my largest expense is food). By reducing your expenses you can also increase your disposable income so you can “blow” it like the person I saw at the shopping market and the subject of my friend’s frustration and motivation behind asking me to write this blog post.

But be careful. The problem with social programs is they offer no future for people. There is no retirement planning and these people continually need these programs and become dependent. The reason why we have to wait for all these luxuries is because we’re waiting until we can afford them without sacrificing our emergency planning, long-term health care and retirement plans. So it may suck watching the abuse but remember in 5, 10 or 20 years those people will be in the same exact spot as they were when they started the program posting on Facebook, “This year will be different” or “Things are about to change” but they never do. Through your short-term sacrificing, your 10-year later Facebook post will be about how much your life has changed.
Try not to judge those on social programs and instead understand that the system has created a negative feedback loop preventing them to escape. Instead focus on your current position and how you could reduce expenses to increase your disposable income to better your life in 5-20 years.