Military Finance Report: December 2013

Friday, December 27, 2013

How to Make a New Year's Resolution

Have you tried to make New Year's Resolutions in the past?  Is the resolution a financial one or a health one?  Does the resolution only last 3 days, 3 weeks or only 3 months?  Don't worry if this happens to you because it happens to a lot of people.  The secrets to making a New Year's Resolution a success are to make more than a one-sentence resolution and keep yourself accountable.  These steps are similar to my How to Set and Complete Financial Goals blog post.  Here's an example of a proper way to execute a financial New Year's Resolution.

Resolution:  I want to become debt free in 2014.  This is where people usually stop.  They may cut some spending the first couple of weeks but then they lose motivation and the New Year's Resolution disappears.  You have to create some short-term goals and a timeline like the one below:
  • Goal 1 - Identify which debt sources should be paid off first.  Always start with the smallest balance and then work your way up, using the free balance from the first source to go after the next, bigger source.  If balances are the same, then go after the one with the highest interest rate.
  • Goal 2 - Divide the total, or the amount of debt you want to reduce by, 12 months.  If you owe $12K, or want to reduce your debt by $12K, then you should shoot for $1K a month.
  • Goal 3 - Get your calendar out and mark each quarter and write it down.  Every two weeks, or every paycheck, remind yourself about the Resolution consistently.
  • Goal 4 - Make yourself accountable.
    • I always recommend using Facebook, Twitter and/or Instagram.  On January 1st, download little images you can post each month or each milestone so you always see what you were supposed to do when you look in your Pictures or Documents folder.  Post it on Facebook and ask your close friends to keep you accountable.  If it's a health goal than you should post progress pics as positive attention is addicting.
    • Make sure your spouse, if applicable, is on board and talk about it frequently with others.  Then when they see you next, they will ask you about how you are doing on it.
    • On a notepad or a Word document, write your January 1, 2015 Facebook post telling everyone that you stuck to your 2014 New Year's Resolution.  Read it frequently.
You can start out by leaving your New Year's Resolution on this blog so we can keep it together.

Sunday, December 22, 2013

Voluntary Separation Pay (VSP) Advice

The Reduction In Force (RIF) guidance, with the criteria, will start coming out from the individual services sometime next week before Christmas.  If you haven't yet read my RIF Advice, please click that link and read that blog post first.  This blog post will give you some information on what to do with a Voluntary Separation Pay (VSP) payment.

A VSP is usually offered to those with more than 6 years of service but less than 20 years.  It is determined by the service, but the Marines have already announced it will be 20% so I imagine the other services will follow suit.  So it is 20% times the Time in Service times the annual basic pay rate.  An E6 with 12 years of service would get $100K before taxes.  (.2 X 12 years X $41,940).  This may initially seem like a lot of money, but if you've read my retirement calculation blog post, you are actually losing out on a lot of "theoretical" retirement money.  But either way, if you are eligible for a VSP and take it, here is some advice on what to do with it.

If you keep up with blog, you should already have an emergency fund set aside with up to 6 months worth of bills.  If you don't, then a large portion of the VSP can be used for living expenses until you get another job.  If you move to a state that has a high unemployment rate, then you may have to use more of the VSP and vice versa if you move to a state with a high employment rate.  DO NOT spend the VSP until you have another job that covers your expenses.

After you have another job, then the VSP can be viewed as another form of a windfall amount of money.  The goal is to maximize your Return on Investment (ROI).  Typically the best ROI is to pay off excessive consumer debt.  Variable rate student loans and credit cards usually carry a 12% or higher rate.  Any money put into reducing this type of debt would give you the highest rate of return.

After this type of debt has been eliminated then you can compare your other debt like fixed student debt, a car and/or house loan.  If they are recent, the interest rate may be less than 5% and you could actually get a better rate of return in the stock market with an average ROI of 8% (4-12%) or real estate with an average ROI of 6% (4-8%).  That being said, there is an emotional ROI that comes with being debt free.  Everyone remembers the first time they felt being debt free and it feels great.

The worst thing to do with a VSP payment is to raise your current cost of living.  An example of this would be to get a new, fancy car.  Usually a fancy car would increase your registration and insurance costs.  So after the car is bought, you now have "theoretically" less money than you had before the VSP because of the increased recurring costs.  These recurring costs are what caused our junior Airmen to be in poor financial condition even after receiving large enlistment/reenlistment bonuses.  This being said, sometimes purchasing new furniture or making a large purchase that doesn't increase recurring costs may be most appropriate. 

Sunday, December 15, 2013

Financial Advice for Military Reduction In Force (RIF)

Most departments in the Department of Defense are facing a Reduction In Force (RIF) which is the military's version of "downsizing".  The Air Force is currently looking at military members with more than 1 year of service and less than 18 years.  Officers and enlisted have different programs, but leaving at 10 years or more would have significant financial implications for many.  Here are some suggestions on planning for a potential RIF.

  1. Emergency Savings - The most important thing in financial planning and for preparing for emergencies is to have an emergency savings account.  This should be about 6 months of living expenses in a "high-yield" savings account that you can access when needed (1 week or less).  I use Capital One 360, and I have a referral link and more analysis on this blog post: Capital One 360 Link.  This emergency savings account will be your first line of defense against a RIF.
  2. Post-Service Entitlements - Make sure you take full advantage of all post-service entitlements.  If the military isn't going to be as loyal as you were during your military service, then take as much as of the entitlements as you can.  The Montgomery GI Bill and Post 9/11 GI Bill will be the primary sources of entitlements for those going back to school if RIF'd.  But some entitlements have a time limit to use them like a VA home loan and both GI Bills (usually 10 years after service).
  3. Start Saving Now! - If you were reluctant to start saving before, then now is a perfect time to take advantage of the ROTH or Traditional Thrift Savings Plan.  You will be unable to contribute to these once you are separated, but you can roll it over to an IRA.  It's a cruel system, but unless you qualify for the 15-year retirement that may be offered, then you get 0% of your retirement.  In a civilian company you would retain some portion of your pension and/or your 401(k) with employer contribution.  In the military, you get NOTHING!  It's called the retirement cliff and is a quick way for the military to make and save money in the long-term.
  4. Reduce Your Debt - If you get notified that you will be RIF'd, you may be facing limited to no income for a while and you should use your current income to reduce your overall debt totals.  I suggest going for the smallest balances first and then roll all that money into the next smallest balance.  If you two balances are similar then pay off the higher interest rate.
  5. Lastly, Stay Connected - If you get RIF'd, it's not a good idea to start all over with a new passion in a new place you've always wanted to go.  There are few exceptions where this has worked for people, but the best thing to do is to go where you have support (i.e. family, old neighborhood, old job) and find a job in a similar field you were in to ensure you have continuity.  Unemployment may have dropped to 7%, but some people (like me) feel this is just economic trickery and doesn't reflect an actual increase in jobs.  Corporations are able to borrow money at low to no interest rates and are able to hire people because it doesn't affect their bottom line.  The interest rates will have to go up soon and corporations will cut employment to restore their bottom lines.
This is a tumultuous time for many but smart financial moves now can help reduce anxiety and prepare for a possible RIF.