Military Finance Report: February 2014

Wednesday, February 26, 2014

I'm Ready to Start Making Money!

Many people have asked me, “My finances are in order, so now what?” I’m very pleased to get this question. When I get asked this, I ensure, and/or assume, they have: accounted for all their expenses (as suggested in my 30-day challenge post), eliminated or reduced their debt levels and, most importantly, established an emergency savings account. If this describes you and you’re ready to start investing and making money, then read on.
·         The first step is to take advantage of tax-sheltered investments. I typically recommend everyone have an Individual Retirement Account (IRA). To determine if you should open a ROTH or Traditional IRA, then read this previous blog post: You can invest up to $5,500 annually in an IRA. Once you have the money in an IRA, you can invest it in pretty much any investment possible—mutual funds, stocks, gold, bonds, etc.
·         If you have more than $5,500 annually to invest, then you should fund your Thrift Savings Plan (TSP). Again, you can choose the ROTH or Traditional accounts, but you are limited to the funds offered by TSP.  For military members, the TSP does not match and for civil service employees, the TSP does match (up to 5% in a complicated matter). You can invest $17,500 (does not include your employer’s contributions) annually to your TSP.  With an IRA and the TSP, you can contribute to $23,000 a year in tax-sheltered investments.
·         On a lateral financial decision, if it makes sense for your particular financial situation, then purchasing a house while in the military is a great investment. When living in the dorms, base housing or renting, you are theoretically “losing” the BAH we receive. If you were a civilian, it would be factored into your base pay, but it is separated in the military. This is a basic discussion and gets more complicated on how to make the decision to buy or rent, but buying a house allows military members to “earn” that BAH.
·         Back to normal investing, if you have more than $23,000 a year to invest, then you can open up a normal taxable, brokerage account with any large bank and purchase stocks, mutual funds, bonds, art, oil, etc up to however much you want to invest.
Mathematically, the earlier you invest the better potential you have for earning a large return on your money. If you do it right, by using tax-sheltered accounts, avoiding fees and saving as much as possible, you could retire early and live a long, financially independent, life.  

Monday, February 24, 2014

How Do Celebrities Go Bankrupt?

Have you ever been confused about how celebrities lose their money so quickly? Has one of your favorite musicians or athletes just filed for bankruptcy even though they just signed a multi-million dollar contract?  How do lotto winners lose their money so quickly and end up worse than they started?  All of these situations happen because these celebrities aren’t watching their expenses. They know they have a lot of income, but they rarely track their expenses. This is an important lesson we all can learn from.
Let’s consider a musician, 19 years old, who has $3M in income and he purchases, in cash, a $2M mansion and a $100K car.  In his mind, he has $900K to live a lavish lifestyle and his recording company is telling him, “It’s just the beginning.”
But what these musicians don’t realize is it’s expensive to have a lot of money once taxes, insurance and maintenance is included. Think about your own car insurance compared to what you drive and your age and then consider how expensive it would be for a 19-year old with a $100K car or two $100K cars. Property tax is based on the value of the house, so the more expensive house, the more taxes. 
But even including all the recurring expenses, our musician would still have a lot of income compared to our standards. Most musicians have money managers handling their finances but never actually see the income and expenses. The money manager may recommend to our musician to stop spending so much, but the lavish lifestyle is addicting and the industry promotes “keeping up” with other celebrities. Eventually, the mathematics catch up and it happens quicker if the musician stops selling records, or the celebrity falls out of popularity, or the athlete gets released.
While we may not have any sympathy for those making $1M or more every year, we can be able to learn from their mistakes and apply to our own income levels. Here are some lessons learned from celebrities:
1.      Know where your money is going. Try my 30-day challenge I discuss in this blog post: http://militaryfinrep.blogspot.com/2014/02/the-secret-to-becoming-financially.html
2.      Sometimes our income is out of our control, but almost always, our expenses are within our control. Like we’ve all seen with celebrities, we’ve seen plenty of “rich” people go broke and I’ve seen plenty of “not rich” people live financial sound lives. Our income determines how much we make but our expenses determine how much we have.
3.      If someone, like your spouse or money manager, tells you to control your spending, then you might want to listen.
4.      “Keeping up” with other people can be a very expensive habit. If you’re concerned with “keeping up” with what other people are spending, then be equally concerned with what they are making to be in line with them.
What’s the most surprising or crazy celebrity, athlete, or lotto winner, financial story you’ve heard?

Tuesday, February 11, 2014

Help, I Need Money Quickly!

Are you at the tipping point of financial distress? Will one more month or year possibly break you financially? Will your financial troubles negatively impact your higher-level security clearance or special access program? If you need extra money quick and don’t have time for most long-term strategies, then the quickest way you can possibly generate extra cash is to adjust your tax withholdings.
People should take care before making this move; however, it is a move that everyone should consider regardless of their financial status. It doesn’t make any financial or economical sense to suffer all year long, paying interest on debt and then receive a large income tax refund at the end of the year. If you typically get more than $2,000 a year or more back in your income tax refund, then consider taking the following steps to get more money back monthly.
-          State Taxes – Search on the internet or contact your local military finance office to see if your state requires you to pay state taxes where you are currently stationed. I’m a California resident and anytime I’m stationed outside California I’m allowed to not pay State taxes. Of course this means that I won’t get any refund back either. If this applies to you then you can go to your local military finance office and ask for a DD Form 2058-1, State Income Tax Exemption Test Certificate. Depending on what day you go in during the month will determine when it will apply to your next paycheck (known as a “cutoff” date), but should take less than a month. I’ve seen people get as much as $20-$50 a paycheck extra by exempting themselves from State taxes.  
-          Military Pay Exemptions – Anyone can change their W-4 exemptions on Mypay (https://mypay.dfas.mil/mypay.aspx) anytime they want.  But before doing that, you should login to MyPay and do the IRS Withholding Calculator that is located in the Federal Withholding section on the Main page. Once you’ve done the calculator you can reasonably determine what your exemptions should be.  Once a year you should redo the calculator to ensure that annual raises and promotions haven’t changed your status. When adjusting your W-4, you can put as many exemptions as you want to adjust your tax withholdings each month, but just keep in mind that this will be the main vehicle that reduces your income tax refund check. If you don’t pay enough during the year, you may owe the IRS money. I’ve seen people get as much as $50-$200 a paycheck extra by CORRECTLY adjusting their withholdings.
Again, take great care when using these techniques. This tip is not just for those struggling with their finances either. Some of our junior enlisted families receive large amounts of Earned Income Credit and receive $5,000 or more tax refunds. These tax refunds are nice at the end of the year, but if you are struggling the whole year and your career or security clearance in jeopardy, then it makes sense to get more of that money in your paycheck every month. If you’re doing well with your finances and you want to maximize your savings, then this is a good way to do it also. Over time, putting your own money to working during the year, instead of at the end, will pay off big time.  Leave a comment and tell me if you've had success with this before.

Tuesday, February 4, 2014

The Secret to Becoming Financially Independent

Financial independence is a goal for many people. The feeling of not having to worry about money is one of life’s ultimate goals. Many people think the secret to being financially independent is to make more money, but I would argue that many rich people don’t feel financially independent. The true secret to being financially independent is from having an overwhelmingly large amount of discretionary (or free) money at each paycheck. That’s why more people dream about winning the $5M lotto than actually trying to earn that much money. The lotto represents all discretionary money. But then this same principle hurts lotto winners as they reduce their discretionary money by increasing the amount of liabilities (bigger houses, expensive cars, the “entourage”, etc.).
The best way to become financial independent and to increase your discretionary money is to track EVERYTHING that you spend for a whole normal month. Take an ordinary month, with ordinary income and expenses, and then keep track of everything that you spend for the entire month.  Once you have done that, you will be able to see exactly what you can change to get more discretionary money.  If the minimum payments on your credit cards are high, then start paying those down to reduce the minimum payment. If you don’t have much wiggle room, then you can save on variable-fixed expenses like gas, groceries, dining out, entertainment funds, etc.
Here’s a sample scenario:
Income
Amount($)
Paycheck
$3,000
Expense
Amount($)
Mortgage/Rent
$1,300
Utilities
$300
Groceries
$400
Car Payment
$250
Insurance
$100
Gas
$150
Credit Card Payments
$100
Total Expenses
$2,600
Total Discretionary
$400
$400 a month may or may not provide the “independent” feeling that people crave but it is the starting point. Now that you know what your discretionary funding is, you can start to pay off your credit cards or your car payment, or you could save your money and try to increase your income. Either way, you now have the starting point to becoming financially independent. I would argue that almost everyone who feels financially independent knows exactly where every dollar goes to, thus taking the 30-day challenge is a great way to start your path to financial freedom.
If you go pay and see a financial advisor, this will be the first step in the process. If you’ve done this in the past, then do it again. Most advisors recommend doing this every six months or at least annually.