Why Do I Need a Good Credit Score?

Some people are very scared of credit and they are right to be scared of it.  But not having any credit can cost you as much as having bad credit.  In my opinion, our current financial system "rewards" people for over utilizing credit.  I've always called it "playing the game".  But here's why living without credit can be costly.

Without "playing the game" you will have a low credit score just like those with bad credit from credit "mistakes".  Having a low credit score can quite literally cost you thousands of dollars.  Using MyFico's national averages today, a $250,000 house with a 760-850 (the max bracket) credit score at a 4.025% interest rate will cost you $1,197 a month in a mortgage payment and you will pay $180K in interest over 30 years.  A credit score of 700-759 will cost you $1,229 a month and you will pay $192K in interest...over $12K more in interest.

Here's a breakdown of what the score brackets will cost you:

 

Image/Calculator courtesy of MyFico.com http://www.myfico.com/myfico/CreditCentral/LoanRates.aspx

Should I Invest in the Traditional TSP or the ROTH TSP

Here is some information about the two types of Thrift Savings Plan (TSP) contribution options you can invest in.  They are the Traditional TSP and the ROTH TSP (started in 2012/2013).  If you want a short answer in which one you should invest in, then I suggest that people under 50 should do the ROTH TSP.  This is because ROTH accounts aren't taxed when the money is finally withdrawn.  But there are many variables before making this decision.

Traditional - The traditional option takes money out pre-tax and lowers your taxable income for that year.  So if you make $25K a year and invest $5K in a traditional TSP, then you will only have $20K of taxable income.  This benefit can be very useful for people that need to lower their taxable income to qualify for financial aid, have variable student loans or annuities and anything else that benefits you to have a lower taxable income.  Once you invest, then you can choose the fund allocation you want and your money will grow tax free.  Once you withdraw the money, it will be taxed as income that year.  Being taxed in retirement is unfavorable because you need to maximize your income as a retiree.  As time goes by, you will become  more dependent on that income which I why recommend the ROTH option.

ROTH - The ROTH option takes money out post taxes and has no affect on your taxable income.  Your money will also grow tax free and WILL NOT be taxed when you withdraw your money.  This option is amazing for people that start investing early in their career because they are currently at a low tax bracket and will get to be tax free when they are in a larger tax bracket because their money grew so much with so much time.

Both TSP accounts are retirement accounts and act like 401(k)s more than IRAs.  There are no income limits to invest in the TSP like IRAs, but most people in the military or civil service don't have to worry about that.  This is an important choice for anyone.  Seek advice or do your own research before making the final choice; however, most financial advisers will recommend the ROTH option for those under 50.

For more detailed information go here: https://www.tsp.gov/PDF/formspubs/tspbk08.pdf

5 Tips to Increase Your Credit Score

Here are 5 tips to increase your credit score.  Some people get a pay raise, a new job or get some extra cash and want to know how to increase their credit score.  These tips should help and I'll post more about each one in detail later.  Increasing your credit score could save you hundreds, thousands or hundreds of thousands of dollars in your future.  A small investment of time and money now may pay off big time both financially and emotionally.

1. Keep good standing with all current debts - You can't change the past.  If you are struggling to make ends meet, then you should stick with this step until you have some extra money to tackle previous debts or trying to increase your credit score.  Your credit score weighs the most recent activity higher, so keeping good standing with current debts will maintain or increase your score more than going into past credit troubles.
2. Make sure your credit reports are accurate - There are a number of reasons why there maybe something incorrect on your credit report.  Go to www.annualcreditreport.com and get your free credit reports and make sure everything is accurate.  If something is wrong, the credit bureau should have a phone number to challenge an item.  I'll tell you upfront that it's not easy to change something and the burden is on the member, not the company who did something wrong or a person that may have used your identity.
3. Pay off any outstanding prior debts - Now that you have your free credit reports, you can try and pay off anything you may have in collections.  Call only one agency at a time because collection agencies are aggressive.  If you have a lump sum, then great, pay it in full.  If you want to make payments, then call the collection agency and be firm.  Use ultimatums like, "Take this payment plan or else I'm walking away."  They may threaten to garnish your wages, but they won't because you calling them to make payments debunks any legal case against you.  Also, try the old "Let me talk to your supervisor" line to make payments.  Go in order of smallest balances so you can get it off your record sooner.
4. Maximize your score - If you have nothing in collections, your credit reports are all accurate and you are current on everything, then it's time to maximize your credit score.  Credit scores are made from "corrupt" math that us humans have decided to make to oppress other humans.  Sorry, that's a little of my own ideologies coming out.  But really, it helps to get help from the source with credit scores.  I recommend going to www.myfico.com and paying $14.95 for their credit report & score.  At the end of the report, there are summaries, tips, recommendations and simulators that you can use to maximize your credit score.
5. Get professional help - Sometimes getting professional help is the best way to increase your credit score.  For military members, USAA offers great free financial advice. Most Airman Family Readiness Centers (or whatever other non-Air Force services call it) have trained or certified financial planners that give free financial advice.  Other civilian-based companies may charge for an hour or two of time.  Either way, sometimes professional help is a great investment.

What's the Value of a Military Retirement?

With all the talk about the Federal Reserve eventually raising interest rates, we should discuss how it affects the value of the military retirement.  As interest rates rise, the theoretical value of a military retirement is reduced.  This is because you can get a higher rate of return on safer, long-term assets with civilian 401(k)s or saving-account equivalents.  Also, the military retirement is fixed for that year and as mortgage rates and loan rates go up, it makes the retirement worth less than the previous year.  The COLA annual increase helps decrease the impact of rising interest rates.

If an O4 with 20 years was about to retire this year (2013), he or she could expect to receive $43,702, annually, before taxes in retirement ($7,283.70/50% * 12 months).  To generate this annual income, one would have to invest in the safest, longest-term asset and the usual measure for this is the 30-year US government bond which currently yields 3.567%.  The value of the retirement at this interest rate is $1,225,175.  This is all theoretical and the only practical use would be to compare what you would have had in a 401(k) after 20 years in a civilian company.

Using the same assumptions, an E7 at 20 years would expect to receive $25,970 before taxes.  The value of the retirement would be $728,074.

If the 30-year bond interest rate goes up 1% to 4.567%, then the O4's retirement value would decrease to $956,913 and the E7's to $568,653.  Again, these values are theoretical, but it is important to know that fixed incomes, like a military retirement, is worth "less" in an environment of higher interest rates.

Hale Koa Review

My wife and I recently spent our 10-year wedding anniversary in Hawaii, the first week of June 2013, and we stayed at the Hale Koa on the island of Oahu.  For the price, exclusivity, and location, I believe the Hale Koa is an excellent choice and would recommend it to anyone in the military.  Here's a list of the pros and cons.

Pros:
Price - Based off our research, the Hale Koa was $100 cheaper than nearby hotels in the Waikiki area.  We booked 6 months in advance and I don't know if that affected the price the of hotel rooms.  The surf was really low in June, so the prices may rise in Aug - Nov when the infamous surf hits the North Shore.

Exclusivity - The hotel serves the military only, including their guests and dependents.  There is an AAFES Base Exchange in the hotel, a small gym, an adult pool, a kid pool and direct access to the beach.  They have a "briefing" in the morning and offer discounts to their Luau which is also exclusive to military members and the show ends with military support.  The Luau wasn't that expensive with the discount and the food, drink and the show was well worth the money.

Location - The location is perfect.  It's in the heart of Waikiki, and only a 30-min drive to Hickam AFB (it's technically a joint base now).  Plus, downtown Waikiki, with its expensive stores and great dining, is less than a 1/2 mile walk away.  During the one week we stayed, we drove around the entire island and saw all the stuff we wanted to.

Cons:
Parking - The parking structure is across a busy street so if you purchase a rental car, you will have to walk to your car by taking a long awkward staircase leading to the outdoor lobby area.  You also have to pay $7 a day to park across a busy street.

Modern amenities - The hotel rooms don't have Wi-Fi.  There is free Wi-Fi available in the kids pool area and the lobby but not in the rooms.  They have wired internet available for free though.  The room comes with a small fridge but no microwave.  There is a community microwave available on each floor.  But if you like to have some food in your hotel room to save on eating out expenses, you'll have to eat small microwaveable items or small fridge items.

Airport shuttle service - Hale Koa was one of the only hotels not to offer a free shuttle service from the airport to the hotel (and vice versa).  The taxi ride can cost up to $40 each way.  This may be due to OPSEC of having a easily identifiable shuttle carrying only military members though.

All things totaled, my wife and I highly recommend the Hale Koa to military members wanting to explore Oahu and Hawaii. 

How to Make More Money with TSP

You can change the amount you invest in the TSP by going to https://mypay.dfas.mil (most users use the CAC login and will need a .mil computer).  You can either enter a percentage amount to invest in the Traditional TSP or you can enter a dollar mount to invest in the ROTH TSP.

Your money will automatically invest into the "G" Fund and you will have to log into www.tsp.gov to actually change the allocation of the money that is donated.  To make more money with TSP you will need to change the allocation out of the "G" fund.  The more risk you can tolerate, the more you should move out of the "G" fund and into the stock funds.  I recommend to always have money in the "C" fund.

Since inception of the funds, the "G" fund has returned 5.69% annually versus the "C" fund's 9.5%.  In the investment world, having all your money in the "G" fund and losing out on the extra return is a LOSS of money.  We call it an opportunity loss because you had the opportunity to earn the money but didn't by investing in the "C" fund.  So to make more money with the TSP, you will need to log onto www.tsp.gov and change your asset allocation out of the "G" fund.

Best Finance Quote

"Saving 3% in a retirement account is like going to the gym for six minutes," says Stuart Ritter, a financial planner and vice-president of T. Rowe Price Investment Services.  I think this is a great quote because sometimes people save a small amount and think, "it's better than nothing," but as retirement gets closer the amount is much less than they hoped and/or planned for.

I wish all people could start saving 10% the day they enter the workforce as teenagers and continue until retirement.

Clark, J.B., (July, 2013) Retirement Setbacks. Kiplinger's Personal Finance.

Market summer pullback, correction, or crash

Many believe, including me, that we will see a summer pullback from the markets highs we are seeing now.  I think we'll see a correction and then a market rally to end the year off.  You can sell your gains and buy back in at a better price with some mutual funds or your TSP account.  You can also wait for your favorite stock to go on sale at a cheaper price and then buy it after the correction.  Cramer agrees...

http://www.cnbc.com/id/100820959

Information about the TSP "C" Fund

Invests exactly inline with the S&P 500. Top ten holdings as of December 2012:

1. Apple
2. Exxon Mobil
3. General Electric
4. Chevron
5. International Business Machines (IBM)
6. Microsoft
7. Johnson & Johnson
8. AT&T
9. Google
10. Proctor and Gamble

https://www.tsp.gov/PDF/formspubs/CFund.pdf

How to get out of debt quick...(great show)

CNBC's "Til Death Do Us Part."  Great show, great idea...

http://www.cnbc.com/id/33421145

5 States with Highest Foreclosures (Marketwatch)

All states with Air Force Bases near them.  Potential opportunity for those with patience.

http://finance.yahoo.com/news/5-states-highest-foreclosure-rates-160446395.html

Military Millionaire?

How can the military make you a millionaire?  In theory of course...

http://www.incharge.org/military-money/story/how-the-military-can