Military Finance Report: May 2015

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.