Military Finance Report

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.

Friday, May 1, 2015

USAA Index Funds (USSPX & USPRX)


This March, LeBron James asked Warren Buffett for investing advice. Mr. Buffett simply told him to keep 10% in cash and 90% of his money in an S&P 500 Index Fund (http://www.cnbc.com/id/102467435). This is becoming the common advice from most professional money managers now. As a whole, individual investors are unable to beat the market and often pay more fees to brokerages trying. Hedge and Private Equity Funds, which are sometimes able to beat the market, are often outside the reach of individual investors. To make the most of your money, Index Funds offer the greatest exposure to American (domestic) stocks; diversify for the lowest overall risk; and often have the least amount of fees.

Military members often choose to bank with USAA because of its exceptional customer service and understanding of the military lifestyle. Personally, I use Fidelity for my brokerage for my IRA and taxable accounts but there have been times when some of the uniqueness of my military career has made transactions difficult. Thanks to fully online services, my military service hasn’t interfered with much of my banking needs. But if you do like to bank with USAA, then USAA offers two S&P 500 Index Funds.

  1. USSPX – S&P 500 Index Fund Member Shares with a minimum investment of $3K. The expense ratio is ~.26% which is really low (a good thing) compared to the category’s average of .59%. The Fund has a 4-star Overall Morningstar Rating which is good and has a 7.78% 10-year average return.
  2. USPRX – S&P 500 Index Fun Reward Shares with a minimum investment of $100K. The expense ratio is ~.16% which is lower than the Member Shares Index Fund because it’s a larger amount of money being spread across the mutual funds and reduces overall transactions for the fund manager. The fund also has a 4-star Overall Morningstar Rating and has a 7.9% 10-year average return which is only slighter higher than the Member Shares fund probably because of the lower expense ratio. If you have $100K to put into one investment then you probably don’t need the advice of this blog (joking).

Index funds are a great way to invest in the stock market without having to make individual stock and mutual fund selections. An S&P 500 Index Fund is still exposed to stock market risk so if the stock market sinks so will the Index Fund. If the market does sink, regular monthly investments, you will be buying more of the fund at lower stock prices. Another risk is the S&P 500 invests in the Top 500 American companies so you may not be exposed to international growth from emerging markets. The Index Fund is ~98% in stocks so as you get older you may be exposed too much stock. LifeCycle Funds often provide better protection as you get older so having a LifeCycle Fund and an Index Fund is the ideal investment strategy.

 

Sunday, April 5, 2015

Financial Stewardship in the Bible


Most of us celebrate Easter by reading Matthew, Chapter 28, Verse 6, “He is not here, for He has risen, just as He said. Come, see the place where He was laying.” (NASB) After your Easter celebration, stay in Matthew and read Matthew, Chapter 25, Verse 14, The Parable of the Talents.
I wasn’t a regular Church-goer and the one Church service my in laws took me to was a sermon about The Parable of the Talents. I loved every second of it. Throughout my pursuit of helping people with their finances I often hear the misquoted; Money is the Root of all Evil. When in fact, 1 Timothy, Chapter 6, Verse 10 says, “For the love of money is a root of all sorts of evil, and some by longing for it have wandered away from the faith and pierced themselves with many griefs.” People “forget” to add the ‘for the love of’ part which warns about greed and they think the Bible somehow supports financial irresponsibility or a #YOLO (you only live once) mentality.

In The Parable of the Talents we learn that God wants us to practice good financial stewardship. Here is how you can apply the teachings to your financial situation.
To one he gave five talents, to another, two, and to another, one, each according to his own ability; and he went on his journey.” Matthew 25:15.

·         God had given different amounts to the three people based off their abilities. Our socio-economic model in America isn’t as fair as God’s model; however, for the most part, with proper education and work ethic we too receive money based on our ability. By getting your college education and have a steadfast work ethic, we increase our ability to earn more income.
Immediately the one who had received the five talents went and traded with them, and gained five more talents. In the same manner the one who had received the two talents gained two more.” Matthew 25:16-17

·         We’ll see in the next couple of versus that in a certain amount of time God will come back and find out their status. Two of the men earned a great return on their investment. Both of them doubled the ‘talents’ or, gold and silver, they had received.  Back then, they had to barter and trade to invest their money. In our time we have many methods of investing our money. With compounding interest and stock market gains you can double, triple and earn a great return on your investment as well. We have to assume they didn’t have much or any debt because they wouldn’t be able to double their money if they were burdened by debt. These two men were good stewards of their money.
But he who received the one talent went away, and dug a hole in the ground and hid his master’s money.” Matthew 25:18

·         Unfortunately for our culture, this is what many people do with their money; often the same people misquoting the 1 Timothy quote mentioned above. If one talent is a person’s Net Worth (assets-liabilities), then most of us don’t even have the one talent that was given to us. Due to excessive debt, not only do we not have the one talent given to us, we have less than one talent and owe someone another talent. We have loaned out God’s money.
The next couple of versus are long but the men who doubled their Five and Two talents told God and he said, “Well done, good and faithful slave. You were faithful with a few things, I will put you in charge of many things; enter into the joy of your master.” Matthew 25:21 & 23

·         God was pleased with their financial stewardship and responsibility. The person with Two talents didn’t complain about not receiving Five talents and managed to double his money and have four talents. The lesson I learned is financial responsibility isn’t about how much you make it’s about what you do with your money. Military members don’t make as much as their civilian counterparts with all the sacrifices we are forced to make but we should maximize what we do make.
And what about the man with only one talent that chose to do nothing with it? “You wicked, lazy slave, you knew that I reap where I did not sow and gather where I scattered no seed.  Then you ought to have put my money in the bank, and on my arrival I would have received my money back with interest.” Matthew 25:26 & 27

·         Is this something you want to hear from your Holy Father…your savior? A wicked and lazy slave? And remember, this man did save his money so he was able to give back the one Talent. How many of us won’t even be able to give back our one Talent because of our debt?
So enjoy your Easter celebration but starting tomorrow (Monday, 6 Apr 15) decide to do the right thing and take control over your finances. Leave a comment or e-mail me if you have financial questions. Seek help from someone if you need it. Either way, it’s time to start practicing good financial stewardship.

Saturday, March 14, 2015

529 College Education Plan


529 plans are tax-deferred accounts used to pay for college expenses for a beneficiary (usually a child/grandchild) ran by states or education institutions. An investment in a 529 plan is invested in stocks and bonds and will grow tax free until the beneficiary is ready to use the money. The deductions are tax exempt if used for qualified college expenses. For the most part, 529s are a great way to save for your child’s college education but there are some considerations to think about before investing in one.
Benefits:

·         Tax Advantages: If you’ve read more than one article from my blog, you know I’m an opponent of taxes and I focus on helping people pay the minimum amount of taxes as possible. The money you invest in a 529 will grow tax free and when your beneficiary is ready to use the money for qualified college expenses, the earnings will also be tax free. 529 contributions are considered gifts so you’ll be maxed out at $14K a year in annual contributions to a 529.

·         Better Returns: 529s plans are run by States and in most cases have better returns than a simple savings account or treasury bonds. A parent starting a 529 when the child is born has ~18 years to save for the child’s college education. Some states do extremely well and provide amazing rates of return.

·         Realistic Program Management: Unlike most programs designed by the government, the 529 program is realistic and versatile. For military members this is especially important because you can switch 529 programs state to state depending on which state you live or are stationed in. You have an opportunity in picking which state has a better rate of return. For all parents, the 529 can be transferred from family member to family member. If one child doesn’t use it then you can pass it to another child or to a grandchild.
Considerations:

·         Sole Purpose: The sole purpose of a 529 plan is to help pay for a beneficiary’s college education. If you’ve saved more than the cost of a college education and have to liquidate the account then you will be penalized. If your child chooses not to attend college or receives a scholarship then you will have to liquidate and be penalized. The penalty for not using the funds for qualified education expenses is a staggering 10% so, if possible, only save enough for the education your beneficiary(s) can use.

·         Financial Aid Concerns: I try not to expose my political ideologies on my blog but financial aid and social programs are being abused by many people and not for its original intent. Financial aid for college is a common place to find such abuse. Many abusers receive more social welfare money for going to college and use financial aid with little intent on graduating college. For those parents who tried their hardest to save for a 529 but will still look for financial aid for their child, may be impacted in getting financial aid because the 529 will be part of the parent’s “net worth” calculation (a.k.a. Expected Family Contribution[EFC]) even though the 529 can only be used for college expenses. A 529 isn’t necessarily a part of the parent’s wealth as it is used for in the EFC calculation.

·         Limited Investment Options: I mentioned above that 529 plans have better returns than a savings account or treasury bonds but there are still limited investment options. You are limited to the State ran 529 plan for the State you choose. Some states offer deals for their own residents but the options are still limited.  

·         Post 9/11 GI Bill: The Post 9/11 GI Bill allows military members to transfer up to 36 months of education benefits to a family member. I received my Bachelor’s and Graduate’s degree using the Montgomery GI Bill (pre-9/11 GI Bill) and haven’t used any of my post 9/11 GI Bill benefits. I can transfer all 36 months to my children (though it comes with a 4-year Active Duty Service Commitment). So going back to the sole purpose consideration, be careful how much you invest if you’re planning on using the post 9/11 GI Bill for your child. You may have to liquidate more than expected and get penalized 10%.
529s are basically run like mutual funds. My #1 choice for all information on mutual funds is Morningstar.com. They have a great 529 Center on their site here: http://529.morningstar.com/state-map.action

Be careful when you’re doing a simple search for 529 information.  Some of the State-ran plans are worth several billion dollars and it’s a big business. Like all investments they want your money so a lot of Google searches will be advertisement-based over research based. Like I said above, I use Morningstar.com to search through 529s.

Wednesday, March 11, 2015

Multi-Level Marketing (MLM) Businesses and Taxes


Multi-Level Marketing businesses (MLMs) have exploded across the country; especially among the military spouse community. MLMs allow military spouses to run their own businesses at home and the job can move with their military spouse. I don’t have an accurate count but I’m sure there are nearly a hundred different MLMs out there. I’ve experienced the following MLMs: Pampered Chef, Amway, WUN Life, Isagenix, Pure Romance, Nerium, Origami Owl, Kyani and Scentsy.
A key thing MLM operators need to know is how to file their taxes. Although I haven’t run an MLM; I do have sufficient experience in tax preparation and here are some suggestions I’ve found doing research on this reader requested topic.

·         Create a separate checkings account to run your MLM. This will allow you to quickly differentiate between costs of running the MLM and income you’ve earned which will come in handy when dealing with deductions.

·         Before you even start your MLM find out if they give you a 1099-Misc Income Tax Form which identifies how much the company records as income you’ve made. Talking with MLM owners I found out that Pure Romance, Pampered Chef and Nerium file 1099-Misc forms with the IRS so you can claim that on your taxes as regular income. If an MLM doesn’t provide a 1099-Misc then it is incumbent on MLM operators to figure out how much income they’ve made. This is easier if you have a separate checkings account.

·         Running an MLM is similar to being self-employed and as such you can claim routine expenses as deductions if you itemize your deductions. If you have a separate checkings account it will make it easier to identify the costs. Some common deductions are phone and internet, party hosting expenses and gas/vehicle expenses for those MLMs which require frequent deliveries and travel. Itemizing deductions can help decrease the tax burden but it is important to ensure you’re legally entitled to the deductions.

·         If your tax situation requires you to itemize deductions then I recommend seeing a tax professional; either a tax preparation company or with a Certified Public Accountant (CPA). A professional can ensure you meet the qualifications for itemizing certain expenses and protect you from an audit.

·         For my non-military readers, if your MLM is your family’s sole source of income PLEASE ensure you meet the necessary requirements to comply with the Affordable Healthcare Act (aka Obamacare). The penalties can be steep and are basically equal to the cost of a “bronze” health care plan. So until the law is changed or repealed, it’s a better return on investment to just ge the healthcare. Like I said before, an MLM is similar to being self-employed so you’ll need to ensure you comply with the federal government’s requirements for health care.
If you’ve run an MLM and filed taxes before please leave me a comment or recommendations you have for other MLM owners.

Tuesday, February 17, 2015

Changes to Military Retirement

This January the final version of the Report of the Military Compensation and Retirement Modernization Commission was published. (http://www.mcrmc.gov/index.php/reports) We’ve been hearing a lot about changing the military retirement plan since Secretary of Defense Hagel announced his ideas in 2013. Unfortunately, this topic is highly political, causes emotional stress and is very misunderstood so much that normal conversations quickly turn unproductive. Here are my thoughts on the situation.
THE PROBLEM
I’ve only been in for 15 years, but I’ve conclude that one of the major problems in the military is the inability to address the root problem. Here are the problems with the current military retirement system—as I see it.

1)      The Defense Budget is one of the largest expenses in discretionary spending. This post isn’t intended to discuss the ideologies about Mandatory and Discretionary spending; however, if there are cuts in the budget to be made, the Defense Budget would be the first place politicians look toward. Like all forms of business, Personnel and Labor are the largest cost drivers. For the military, our unique 20-year, annual inflation-adjusted, retirement plan is one of the most costly expenses. So the first problem is…budgets need to be cut and military retirement is a major cost driver to focus on by politicians.

2)      The second problem is the 20-year cliff dive. We have many Armed Forces members who serve honorably for less than 20 years and decide to separate. Besides what they’ve managed to save in their TSP or other savings, they do not receive any portion of their military retirement. This creates a 20-year, all or nothing, retirement plan. Many civilian jobs offer matching 401(k)s and pensions which compensate employees after an outlined amount of years.
SOLUTIONS (so far)

1)      Status Quo - Like I said, this issue is highly political and emotional. On most news sites, there are 300+ comments from retired military members and veterans regaling their war stories and any change to the military retirement plan offends them. All current recommendations would only apply to new military members so they wouldn’t even be impacted anyway. This solution will not last. There are some strong proponents of the status quo, including high-ranking members of professional enlisted and officer organizations. Regardless, the political pressure is getting stronger every year with little appetite to cut any budget anywhere else.

2)      Commission’s Recommendations - Senator Graham (R-NC) recently supported the Commission’s recommendation which is 40% of base pay at 20 years instead of 50%. Military members will get matching TSP contributions so if they choose to honorably separate before 20 years, they will have some retirement savings. (http://militaryadvantage.military.com/2015/02/graham-defends-pay-commission-after-hearing-its-critics/#idc-cover) Many professional organizations are opponents of this solution. They point several inconsistencies with the analysis the commission performed on their recommendation. These inconsistencies must be addressed because mathematically, even a one-percentage slip could cost a military member hundreds of thousands of dollars over several decades.

MY THOUGHTS
Personally, I believe the military retirement should be changed. Military members separating before 20 years should receive sufficient compensation; especially in light of how inept Veteran’s Affairs (VA) is. It’s is unacceptable to leave the fates of veterans with the support from the VA. Selfishly, I would not like the amount of retirement to change. I don’t have a solution at this time but I think about it regularly and I do know that if we're going to change it then we should provide a solution before Congress provides one for us.

What solutions do you have?

Thursday, January 22, 2015

Top 3 Personal Finance Sites and Apps

The first step towards financial success is to track your money. You need to know where your money is going before you can make any sound decisions. There are many personal finance websites and apps that can help you do this. They integrate into your bank accounts and have amazing tools to help you manage your finances. Many of them are free so you may have to deal with some advertisements, but other than that, they are strong/powerful tools to aid you with your finances. Here are the top three that I’ve had personal experience with and/or had discussed with others about.
  • Mint - I used this for almost a year and I liked it a lot. I was able to integrate all my accounts in it and it helped create good trackers and it let me track some of my personal goals. I had it on my desktop and the iPhone app. The iPhone app had a lot of advertisements, but it’s worth it. I want this blog to become a good source of information and I also rely on advertisements to help earn income. The app is owned by Intuit so if you’ve used Quicken to prepare your taxes, then some of your Mint information can quickly transfer over when filing your taxes.
  • You Need a Budget (YNAB) – The full service costs money but it offers a social experience to it too. You can go on their forums and talk to others, view their tutorials and lessons and get real advice from professionals. They’ve recently released a free “lite” version of their product and it’s still very powerful. Some of my friends love the feature that gives you tailored advice if it notices you’re living paycheck-to-paycheck. I’ve been helping people with their finances for over a decade now and a lot of people don’t like asking for financial help (especially men). A friend of mine loved getting good advice from the app while retaining his privacy.
  • Personal Capital – A friend personally recommended I post about this one. This site is less about the budget and more about investing and managing your money. I’ve read a lot of good reviews from users and they are very happy with the reduced amount of advertisements compared to Mint.com. I’ve never personally used it before but I trust the recommendation.
These are very powerful tools that you can use. Working with a Certified Financial Planner can be very costly, so even paying $60 for YNAB will save you money over the long run. Check out each website and let me know which one you prefer or like to use.  What other sites do people use?