Military Finance Report: September 2014

Sunday, September 21, 2014

Military Retirement Plan

A majority of the people I've helped with their finances have been military members within 5 years, or even days, from retiring. They're concerned about only receiving 50% of their basic pay and not receiving BAH or BAS anymore. Anytime is a good time to start getting your finances settled but the earlier you start in your military career the better.

If done correctly, military members can retire from working at 40 years old. Imagine not having to work at the end of a 22-year career and only being 40 years old. When military members retire, after 20 years in the military, we get 50% of our basic pay (only basic pay) and an additional 2.5% each year after. If you start at the beginning of your career, you can have enough to make up the remaining portion of your basic pay when you retire.

For example, an E-8 at 22 years makes $5,115.30 a month (in 2014). The E-8 is entitled to 55% of his or her basic pay in retirement. 50% for twenty years and 2.5% for both years after. This would be $2,813 every month for the rest of his or her life, or $33, 756 annually and if you start saving now, you can earn enough income to get paid like you did when you were in active duty. You can potentially make enough to earn what you were getting in Housing Allowance (BAH) and Food (BAS).

To make up the remaining pay the E-8 would have to save up $552K and earn 5% when he or she retires. This may seem like a lot of money to save up, but by starting your Thrift Savings Plan (TSP) right away, investing in an Individual Retirement Account (IRA), buying real estate, living within your means and keeping debt to a minimum you can easily save this much money (or near it). $552K earning 5% a year would earn you $27,624 a year.

This discussion is theoretical because you can't withdrawal those savings from your TSP and IRAs until you are 59 1/2. But the point is, starting early and saving as much as you can will put you in a prime retirement position.

Saturday, September 13, 2014

30 Sep End of the Fiscal Year is Coming

It's getting close to 30 Sep and, for us Department of Defense finance folks, that means it's time for the end of the Fiscal Year. For some people, conversations about the military budget may sound like a foreign language but regardless of your rank or position in the military, it's a language worth learning. Understanding the budget process can help you immensely in your career from the lowest ranking enlisted member to a 4-star general. Here are some common terms you may need.

  • Fiscal Year - Our fiscal year goes from 1 Oct to 30 Sep. So FY14 started 1 Oct 13 and will end 30 Sep 14.
  • Appropriations - These are the different types of funds we receive from Congress. Article 1 of the U.S. Constitution states, "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time." This means we can only spend the money given to us by Congress; no more, no less. 
  • "O and M" - Your Operations and Maintenance (O&M) appropriations are the types of funds that 90% of the military use in their day-to-day operations. There is also Procurement, Investment and R/D.
  • Obligations - An obligation simply means we've spent the money given to us. You may also hear "commitment" which means we've committed to spending money but we haven't actually completed the transaction. By 30 Sep, the DoD must be 100% obligated which means in the month of September, a lot of End-of-Year spending happens. Some of this spending may get frivolous as each level or organization ensures it doesn't have to return the funds given to them. For tips on how to prevent this frivolous spending, check out my post earlier this year. End of Fiscal Year Discussion
  • Bona Fide Need - This is a law that states we must have an immediate need for something when we purchase it. So you can't use FY14 funds to buy something you know you won't need until March FY15. The law allows us to purchase some items that have lead time so we have necessary supplies and equipment the first couple months of the new FY. 
  • Form 9 - Certain requirements need to be purchased through your Contracting organization. In the Air Force, we call this a Form 9. I'm not sure what the other services call it but this is the Form your resource advisor will help you create to get the requirement you need. It can take a significant amount of lead time, so if you need something, get the leg work done sooner than later. 
  • MIPR - This is an intra-agency form we use to send other agencies money to execute a requirement for us. If you have a requirement that will require a MIPR, then you'll have to get with your Resource Advisor to find out what information you'll need.
  • "CRA" - Continuing Resolution Authority (CRA) is a temporary, yet restricted, authority to spend money until Congress passes the budget. Starting 1 Oct to the time the budget is passed, the DoD is under CRA which means you'll be restricted in how much you can spend and you're unable to start any new projects. Many units become risk averse and severely restrict spending during this time.
  • Initial Distribution - Once the budget has been passed, each organization will eventually get its Initial Distribution, which just means it will get its budget for the whole year and normal spending can resume.
Hopefully, this helps you understand some of the conversations you'll hear this month. A lot of military members get bogged down with arguing and fighting how the system has been set up, but the successful ones learn the system. If there is a term you hear that you want explaining please leave a comment and I'll explain it.

Monday, September 1, 2014

Started from the Bottom Now...Wait..I'm Still Here

 A lot of my readers really enjoyed one of my previous blog posts, "Started From the Bottom", where I quoted a famous hip hop song by Drake. The target audience was for young junior enlisted, but was general enough for anyone just starting out in the finance world. But some readers reached out to me and they were concerned about being over 30-years old and having very little flexibility to start improving their finances. They felt like they were at the bottom and couldn't go anywhere. Here are some steps to take if you're at the bottom and nearing the breaking point with your finances.
  • Find flexibility. Most people feel like they have no flexibility with their finances. They've reached a point where there is no money left over between paychecks and they may even be adding more to their credit cards each paycheck just to get by. This is the standard negative snowball effect which will ultimately lead to bankruptcy. You must stop this process. A good way to find additional savings is to track everything you spend for 30 days. Inevitably, you will find some savings; whether it is: not going out to eat one night, reducing your cable or phone bill or finding a cheaper alternative to a routine expense. Use the flexibility you find to stop using your credit cards each paycheck.
    • Finding this flexibility is the single most important step. A lot of people start to feel "suffocated" about their financial position and they ignore it making it worse. Track everything for 30 days and find the flexibility. I know it's there. Contact me at anytime and I'll help you find the flexibility (for free, I'm not selling anything, absolutely free). 
  • Pay down your credit cards. Some people find themselves having no money after they pay their normal bills and their credit cards. You must pay down your credit card debt quickly, even if it's only adding $5 to your minimum payment. This extra $5 will go straight to the principal and it will start building momentum to paying of the credit cards quicker. You'll start noticing the minimum payments go down and you'll start to open positive options in your financial life.
  • Seek assistance. If you're a military member, go see your First Sergeant or your service-specific Family Readiness center. The Family Readiness Centers are an underutilized benefit we all have in the military. They employ or have access to professional money managers who could help you with your finances for free. Financial advice in the civilian world could cost $50-$200 an hour.  If you're financial situation is really bad, they can grant you a no- or low-interest loan to help prevent bankruptcy.
Starting from the bottom can be difficult but there are many ways to get out. If you're staying up late at night because you're worried about your finances then you need to find help. Finding flexibility and paying down your credit cards can be a slow process but it'll be worth it when you can finally say, "Started from the bottom, now I'm here."