2018 New Year's Financial Resolutions

Before you create your 2018 New Year’s Financial Resolution goals, make sure you’ve spent the time to track your monthly or annual expenses so you know your current financial position.  Every December, I create financial goals for the next year.  Additionally, I make stretch goals which require hard work, research, risk, and luck to achieve.  2017 has been the first year I’ve made all my stretch goals.  Here are my 2018 New Year’s Financial Resolution goals.

1. Max out my IRA.  This is the first thing I do every year.  There’s a small debate whether it’s good to save the previous year so you can fund your IRA the first day of the new year or use new year money to fund it.  This is a silly debate to me.  The key is to take advantage of the small pittance of non-employer provided tax sheltering the [oppressive] government allows us to take.  When you do it in the tax year doesn’t really matter—only the investments you make with that money determine your return.
2. Increase emergency savings account/short-term cash savings.  As my net worth increases, so does my desire to have money in a money market or high-yield savings account.  I also save for any short-term goals I have that year requiring access to cash.  I come from a poorer immediate family with little support from extended family.  This requires me to be more conservative with emergency savings accounts.  If you have a stronger support network, you can join the ever-popular movement foregoing emergency savings accounts.
3. Save at least $X from each paycheck.  Most people prefer the “pay yourself first” method where you save money before doing anything else.  To meet my stretch goals, I usually reduce dining out expenses or find other ways to save money like reducing my monthly bills.  Excluding my mortgage payments, my 2017 savings rate was 38%--58% if you include my mortgage.  I plan to increase the savings rate in 2018.
4. Increase passive income from previous year by 25%.  I don’t actively seek to increase the passive income because it depends on how well my long-term mutual funds do and distribute at the end of the year; if my short-term stocks are dividends stocks; and how much I put into savings and bond funds depending on my allocation percentages.  As stocks go up, I put more in bonds and as stocks go down, I sell out of bonds and buy quality stocks at cheaper prices.  I f I have a lot in bonds, I’ll earn more interest.
5. Increase Net Assets to $X.  This is my furthest of a stretch goal.  It requires 12% or greater returns on nearly all my investments.  2017 was the first year I’ve met and exceeded this stretch goal because of good stock returns and the massive increase in my cryptocurrency portfolio.  Bitcoin alone made up nearly 20% of my net asset gain this year.  The only asset that didn’t significantly increase was my home equity.  Despite a year’s worth of mortgage payments, the housing prices barely moved in my location.

What are your financial goals in 2018?  If you need help, leave a comment and we’ll create some together.

Switching to GEICO Auto Insurance Saved Me 24%

THIS IS NOT A PAID POST.  I’VE RECEIVED NO COMPENSATION FROM GEICO.

We’re all familiar with GEICO’s slogan of “15 minutes can save you 15% or more.”  In my case, GEICO saved me 24% by switching to GEICO from USAA.  I’ve been a fan of USAA for a long time, but over the past 5 years I’ve personally noticed a significant drop in customer service.  Here’s my story of how and why I switched my auto insurance to GEICO.

I’m currently stationed in Louisiana (LA), which has one of the highest auto insurance rates that I’ve experienced.  LA rates are even higher than the California coast, which was my previous duty station.  LA does offer a 25% (well, not exactly 25%) discount for military members.  I completed my form in January of 2014 and in November of 2017, I found out you have to complete the form every time you renew your policy.  So in my case this is seven 6-month policy renewals where I missed out on the “25%” discount—costing me over $400.  Here are some problems with this process:

• According to 2 customer service representatives, by LA law, they are not allowed to remind military members about the discount
• Your policy renewal is sent through your message and nowhere in it does it say “Action”
• The military discount sheet is on PAGE 10 of a multi-page document instead of upfront so you know you must take action
• According to the 2 customer service reps, by LA law, they can’t retroactively pay you back for missed discounts. After talking to multiple military members, this may be untrue, as other LA military members have been back paid.
• The 25% discount is not a true discount. It only applies to vehicles registered in LA, so in my case it was only going to be a 12% discount. I imagine a lot of military members have cars registered in multiple states.
• Not all USAA agents can answer LA insurance questions, so the online chat can’t help you, nor can the initial representative help you. You will be transferred; you will have to be on hold.

A coworker overheard the troubles I was having and recommended switching to GEICO.  I was with GEICO 17 years ago and they did not offer competitive prices.  At the time, USAA was 75% cheaper than GEICO when I was young and enlisted.  This week, I called GEICO and ran through three different scenarios.

1. I could keep my USAA Auto and Property insurance (status quo).  To keep an apples-to-apples comparison with GEICO, I added the Auto and Home combination discount of $11 ($132 divided by 12 months) that I get for my property insurance, to my current auto insurance policy adjusting my monthly payment to $220.  I have a 17-year old son which is why my payment is so high.  Start budgeting now if you’re approaching teenage years.
2. I could switch to GEICO Auto and keep my USAA Property insurance.  To maintain the equal comparison, I added USAA’s Auto and Property insurance discount of $11 to my GEICO quote and my adjusted monthly auto payment would be $167—though the actual payment will only be $157.
3. I could switch to GEICO Auto and GEICO Property insurance.  GEICO was unable to match USAA’s $1,100 worth of annual discounts and savings, theoretically adding an additional $92 to the reduced monthly cost of $147, giving an adjusted cost of $239 a month.  The reason why I added the increased insurance premium to my auto insurance is because I needed a way to compare switching auto insurance policies alone by keeping all things equal.  In economics, we use the Latin phrase Ceretis Parubis, which means “all other things being equal.”

As you can see, by comparing the adjusted costs between the status quo of $220 a month and switching just my auto insurance to GEICO at $167, I could save nearly $53—a 24% savings.  It’s sad to leave a company after 17 years, but GEICO has nearly the same customer service satisfaction rate as USAA and after this week’s dealings with both companies, I can say that GEICO may exceed USAA’s customer service—at least in the insurance division.  Check it out yourself to see if 15 minutes can save you 15% or more.

Blended Retirement System Continuation Pay Details

The Air Force released PDSM 17-88 (dtd 30 November 2018) giving more information on the Calendar Year (CY) 2018 Blended Retirement System (BRS) Continuation Pay.  The continuation pay is a critical piece of the BRS and a key component for members struggling with the choice of opting in to the BRS or staying with the current 50% at 20 annuity.  Continuation pay is for active component and reserve component on active guard reserve Title 10 orders who:

• Are covered under the BRS (they will have to opt in on 1 Jan 18)
• Completed 12 years of service
•  Are able to obtain 48 months of retainability

The continuation pay for CY18 is 2.5 times the member’s monthly BASIC PAY.  It’s important to note that this is for basic pay only.  Many military members go straight to their LES and look at their gross pay and use that for bonus and retirement calculations.

Military members call it the “hump” after 10 years of service and it typically means we plan on staying in for 20 years—especially for those married with kids.  To take this pay, a military member will have to opt in to the BRS and will have the reduced annuity to 40% and only have 8 years of “saving” with the matching TSP contributions.  The military member will have a 4-year active duty service commitment, so the member will be in for 16 years after taking the continuation pay.

RECOMMENDATION:  Based off this information, and for people having to make the choice in the next couple of years, my recommendation is:  If you’re at 12 years, and know 100% sure you will retire from the Air Force, you should stick with the current 50% annuity retirement system. 

If there’s any chance you’ll get out prior to 20 years, then the continuation pay, plus 4-8 years of TSP contributions can be a nice separation bonus.  If you don’t opt into the BRS and separate before 20 years, under the current system, you get nothing but your unmatched TSP contributions to that point.  Current available information states very few of us will actually do 20 years, so not taking the continuation pay and getting the matching contributions, puts you at risk at separating with nothing.    

Blended Retirement System Basics

This post helps you understand the Blended Retirement System (BRS) basics.  Do you, now, or will you, supervise new enlisted military members or new officers?  Are you fluent on all the details of the new BRS that take affect starting 1 January 2018?  I suspect most of us aren’t.  Without going into all the details of the BRS, here are some things you need to know as a Supervisor or Commander.

Tell your new military members to save AT LEAST 5% of their paycheck to the Thrift Savings Plan (TSP) so they can MAX out the DOD contributions.

• Every new armed forces member will receive a DOD contribution of 1% of their salary to the TSP after 60 days of service.  This is automatic and the member will not have to do anything.
• All DOD TSP contributions belong to the member.  This means that even if they only do 60 days - 19 years, and don’t qualify for the “annuity”, they keep their DOD TSP contributions.  This is one of the key characteristics of the BRS.  Before the BRS, military members received nothing, but their own TSP contributions, if they did not complete 20 years of military service.
• If the member contributes 5% of their paycheck, they will receive an additional 4% (10% total, 1% from the automatic contribution) in DOD contributions.  This 5% DOD contribution is FREE money.

To adjust their contribution rate, they’ll need to go to MyPay (https://mypay.dfas.mil) à Traditional TSP and ROTH TSP à Change the contribution % to 5 (more is ideal).

• I’m hoping that supervisors at all levels discuss personal finances with their new members in the first 30 days of arrival at a new assignment.
• For 90% (my own opinion) of all new personnel, the ROTH TSP is the best option.  There are some exceptions of why a Traditional TSP is a better option for young personnel.  One exception is for lawyers that have massive school loans and the payments are income dependent.  A Traditional TSP lowers your Adjustable Gross Income (AGI) and lowers the payments.

Once they’ve changed their contributions to 5%, tell your new military member to go to www.tsp.gov, get a PIN, and then adjust their “portfolio allocation.”

• The “G” Fund is the default fund.  A lot of people I’ve financially helped didn’t know that their TSP contributions have all been in the G fund.  The 10-year rate of return is only 2.63% for the G fund, compared to the S Fund’s 8.13%. (https://www.tsp.gov/InvestmentFunds/FundPerformance/annualReturns.html)
• If you don’t know anything about the individual funds, then I recommend your new military member put all their money into the farthest out LifeCycle Fund.  As of 2017, the L2050 is the farthest out LifeCycle Fund.

There are other changes that they should keep track of.

• If they plan on doing 20 years or more, they need to know that the “annuity” went down from 50%, to 40% of their base pay.
• Depending on their career field, they should be on the lookout for continuation pay near their 12-year mark.
• If you supervise military members that have to face the opt-in, then I recommend you discuss with your services’ Family Readiness Center and talk to a trained BRS counselor.

Lastly, tell your new military members that saving money, staying out of debt, and investing will lead to financial success in the future.

• If you or your new military member is looking to start a financial journey, I encourage reading this article on my other website, the Financial Genome Project, at http://financialgenomeproject.net/where-to-start/. 
  
  

What does FIRE mean?

FIRE is a new acronym spreading like fire (pun) throughout the personal finance world.  It stands for Financially Independent and Retired Early.  FIRE is the new personal finance goal replacing “I want to be rich.”  Being rich really means nothing—the same as being wealthy.  FIRE is the new standard because it allows us to define goals and objectives, and more importantly, measure our progress.  Let’s look at each one separately.

Financially Independent – The goal of being financially independent is to create a lifestyle focused on passively earning income while minimizing expenses.  There are many objectives you can use to achieve being financially independent and here are some: 

• Generate passive income – You can do this by investing and earning interest and dividends.  Renting out real-estate properties is a very common method.  You can also do this by having a side job like blogging.  The main objective is to create multiple “streams” of passive income so you minimize risks of losing a stream.
• Minimizing expenses – The most common mistake people make is losing control of their expenses or living beyond their means.  Minimizing expenses allows you to make the most out of your income and to save more.  This means staying away from debt, making smart purchases, and being aware of how much you’re willing to spend on entertainment and services 
• Increase your savings rate – By using your primary income to generate passive income and minimize expenses, you should be able to increase your savings rate.  Unfortunately, many people struggle to save at least 10%, when we should be striving for a 25-50% savings rate (or higher if possible).  In an age of seemingly infinite resources and excessive consumerism, people are struggling to save any money.

Retired Early – Defining “early” is a personal goal.  There is a huge movement to break away from retiring at 60 or later, and having very limited time to enjoy your retirement years.   Retiring early also doesn’t mean a specific retirement savings goal either.  For example, some people just want one million dollars without thinking what the $1M will provide or how long it will last in retirement.  The objective of working towards retiring early involves identifying how much you’ll need to generate by the time you retire.  You calculate how much retiring will cost you annually and then figure out much you’ll need to retire at the specified time you’d like to retire.

• Identify WHEN and HOW you’d like to retire – A common retirement goal for military members is to retire from the military at ~45 within the same lifestyle they were living.  When military members retire after 20 years of service, we receive 50% of our basic pay plus an additional 2.5% for each year after that.  In the beginning of 2018, the retirement system will change significantly.  The main problem with that goal is that BAH (Housing Allowance) is not part of our retirement, so military members actually only retire with 35% of their paycheck.  They’d need to generate an additional 65% of that income through investing and passive-income strategies in only about 20 years—a difficult task.  A generic FIRE goal is to retire at 55 with a lifestyle slightly less than having full-time jobs.  It’s recommended that your expenses (living, traveling, hobbies) only make up 80% or less of pre-retirement expenses.
• Your savings rate is within your control – The easiest ways to retire early are to have a high savings rate and live a retired lifestyle within your means.  It would be difficult to retire early saving only 10% of your income.  Conversely, one could retire early within an aggressive savings rate of 50% or more.  Additionally, you could also live a life in retirement which requires very little income.  I know one military family that will only need $25K a year for their retirement plans.  The military member’s retirement income will fully cover the cost of their simple retirement.

The people most interested in FIRE tend to be minimalists.  They have no interest in excessive consumerism or working until they’re old.  They want to enjoy life earlier and without the distractions of excessive TV consumption, celebrity worship, and the exhaustion of a hectic life.  Is this something that interests you?