Military Finance Report: August 2015

Tuesday, August 18, 2015

It Takes Money to Make Money

You’ve probably heard the phrase; It takes money to make money. Have you ever wondered what that actually meant? Let’s take a look at different aspects of life and how this phrase applies. Also, I’ll provide tips on how to navigate through this so you can make money without having a lot of money.

  • Young Adult Head Start: When parents buy or provide their children a car at a young age, they are giving them access to get a job. By having a job, the children can save and invest the money at a younger age giving them more money to make money. Also, when parents pay for college, their children are able to make more money quicker, be promoted faster, and be insulated better against long periods of unemployment.
    • My parents weren’t able to buy me a car or pay for college. I joined the Air Force and was able to acquire them myself. I was 19 when I bought my first car and didn’t receive my degree until I was 26. Someone who had a car at 16 and graduated college at 22 had much more time to save and invest than I did.
    • Advice: Help your child work and save for a car so they can start working at an earlier age; doing the same for college yields exponential dividends for your children. There’s not a lot you can do if your parents couldn’t afford these for you except to make it right for your children.
  • Debt: People who have a lot of money tend to avoid debt. Having a lot of debt means you’ll continuously have less money and it’s a negative feedback loop that is hard to get out of. People without money need more money but money is more expensive when you’re in debt.
    • Advice: Reduce and/or eliminate your consumer debt now (credit cards and small loans)
  • Credit Scores: You need a good credit score to be issued credit but you can’t get a good credit score until you can get credit. This is a double-edged standard many people face. Typically, it takes having money to sustain a good credit score. A good credit score is extremely important because it saves you from 1) having to put large deposits on common utilities 2) makes college, car and house loans cheaper which means you can save more money and 3) keeps credit card interest rates low so if you do run into financial trouble you won’t get buried quickly.
    • Advice: If you have children, then establish teen credit accounts. Starting early is essential is important because each loan you take out will save you money with a good credit score. If your credit is in shambles then repairing it should be the first thing you start working towards after you establish an emergency savings account.
  • Fees: For bank and brokerage accounts, the more money you have, the less you have to pay in fees. Minimum account balance fees will eat away at your savings. It’s better not to invest your money, avoid the fees, and then wait until you have the minimum account balance. People who don’t make a lot of money are forced to take out $20 at a time from the bank and pay ATM fees each time. A $2 ATM fee on a $20 withdrawal is the same as a 10% loss to your savings. Also, people with money usually don’t worry about Overdraft fees. Some banks charge $29 regardless of the overdrawn amount. If you overdrew your account by $1 and have to pay $29, then you theoretically suffered a 2,900% loss.
    • When I started my first bank account, I was getting charged $8 a month for not having direct deposit to my checkings and $3 a month for not having the required minimum balance in my savings account. $11 a month in fees is a lot of money for an E-3. This was before internet banking really took off so reconciling accounts was difficult.
    • Advice: Check your bank and brokerage accounts right now and make sure you’re not being charged any fees. During the financial collapse of 2008, banks had to restructure their accounts to regain confidence with the public. A benefit to customers was a serious reduction in normal fees. If you’re being charged fees, then you need to switch bank accounts or stop whatever action is causing those fees. For example, USAA doesn’t charge an ATM fee and will reimburse up to $15 a month for ATM machine fees.
  • Investments: This is the simple “Time Value of Money” principle. The more money you have to invest now will be worth more in the future. Mathematically, if you’re over 30 without $100K saved up in non-pension/military retirement accounts, then you’re seriously jeopardizing your retirement goals. People who have more money to invest earlier get to reap the benefits of compounding returns.
    • Advice: Start investing now in an IRA and/or your TSP/401(k).

Having money means you can make more money and so on. If you’re flat broke, then it’s time to start moving. It takes money to make money is just a parable form of the math behind investing early.

Tuesday, August 4, 2015

Betterment Review

I started an account with Betterment today. From what I can tell this is a perfect way for many of us to invest and I’m recommending people try it.

Click here to set up your own account.

The User Interface is really simple and offers a service that I appreciate the most in the investing world yet it’s so rare: Transparency! Your summary page shows you all the necessary details to track how much you’ve invested, how much you’ve earned and how much the fees cost.

It’s basically an automated system investing in low cost Exchange Traded Funds (ETFs).  As the website says, “Through diversification, automated rebalancing, better behavior, and lower fees, Betterment customers can expect 4.30% higher returns than a typical DIY investor.”

This speaks to me personally because I have not been able to excel in investing by doing it myself. Last year I decided to reassess my investing style and move towards Index Funds and this Betterment account should help me reach my goals faster than what I’ve been able to do.

If you’re interested in setting up a Betterment account, please click here to participate in their referral program where you and I both get 30 days free account usage (no fees).