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.

Ready to Become a Military Millionaire

Most of my blog posts are written for people just starting out on their path to financial independence. I focus on that demographic because I feel most people in the military that may read my blog are probably just starting or have a surface-level knowledge base of personal finances. This blog post however, is for people already financially secure and who are ready to turn it up a notch. This post is for those aspiring to become military millionaires.

• Ditch the “all cash” emergency savings. This first step is in direct contradiction with what I tell 95% of the people I help. I always recommend people have easy access to cash for emergencies. An emergency savings account is extremely important for people just starting out because it will shield them from unexpected expenses that may derail their financial success. Having an “all cash” emergency savings account isn’t as important for those that are higher ranking, have almost no real debt and have excellent credit. For these people, they should invest their money in conservative to moderate-conservative investments. For me, it takes less than 3 days to sell mutual funds and transfer the cash. Right now, I have cash only in my short-term goal account and it only earns a .75% interest rate (that’s less than 1%). People looking to become wealthy need to maximize their returns at all times and having a significant cash withhold can hamper those returns.
• Debt is not a bad thing. Think big. For people with low financial knowledge and for the majority of America, debt is the new slavery. We are enslaved to consumerism and the banks own all of our debt. We have no assets to claim for that debt; i.e. college loans and credit cards. This is simply our slavery to banks and insurance companies. For people with high financial knowledge, debt is simply a tool. They have assets to claim for that debt and ensure they always have equity in that debt. Real estate, smart auto purchases, margin investment accounts and business loans are types of leverage where people earn more money than it costs to owe the money. For example, purchasing a home creates a large “debt” but is also a large “asset.” In the military, if we don’t invest our BAH, then we lose it. Going into “debt” with a home loan allows us to reap the BAH benefit. I spend most of my time helping people dig their way out of consumer debt and I wish I could spend more time helping people with their leverage.
• Promote, save, retire, work, save and retire. This is a model most people in the military talk about but rarely execute correctly. Whether you enlisted or commissioned right away, the goal is to promote quickly. For commissioned officers, you need to complete all the things you have control over; right positions, professional certifications, Master’s degree and PME. For enlisted, study for each rank and focus on making the next rank. I made E-4 early, E-5 first time but then took 4 times to make E-6 before crossing over to the dark side in becoming a commissioned officer. This represents a large loss of income as I tried to focus on my degree. While in the military you should save as much as you can in your IRAs, TSPs, real estate and taxable accounts. Then when you retire from the military, some people as early as 37/38, get another job, save all your money and retire from that job; again, some people as early as 45-55. It doesn’t matter if you transition to civil service or corporate life. A lot of people don’t calculate their military retirement correctly and then find out they don’t have sufficient money to actually retire. Remember, our military retirement is only 50-75% of our base pay and doesn’t include COLA, BAH or BAS. For my current location, my retirement would only be 35% of my current paycheck.
• Get another job. Even with excellent investment returns our pay doesn’t make it easy to become a millionaire in 20-30 years. After raising a family and normal expenses, we simply don’t make enough to put away a million dollars. Most people get another job or position their spouse to launch a successful company. I know friends who’ve opened their own business and after years of hard work have eclipsed their own military paychecks making retiring from the military an easy transition.

Unless you’re in an excellent financial position, I wouldn’t follow this advice. For most people, following “vanilla” advice will help secure a good financial position. This blog post is for people ready to invest and have the ability to position them to become military millionaires.  

Budgeting Made Easy

For most people, being on a budget feels like being on a diet. The first thing people think of when they consider a budget is restrictions. Having a budget isn’t about restricting; it’s more about knowing where your money is going and knowing where your money goes is one of the most crucial steps to financial planning. I recommend doing the 30-day spending challenge I wrote about here: 30-day Challenge to track your expenses. Creating a simple budget is easy. Here’s how I recommend starting.

1.       Income. On the left side of your excel sheet or piece of paper, list how much you make in a month. Then on the right side, list your bills.

2.      Fixed bills. Start with listing your fixed bills. These are the bills that never change regardless of how you conduct your life and/or the minimum payments on installment loans. This typically includes rent/mortgage, insurance, car and student loan payments and sewer/trash bills. Generally speaking, you have no control over these bills.

3.      Variable bills. Next, list your variable bills. These are bills where if needed, you can reduce them if you need additional money. This typically includes gas, food, cable, phone, electricity, water, etc. When people come to see in dire financial need, it’s easy to reduce fast food consumption or simply downgrade current internet and cable service freeing up additional income to get out of their predicament. Use an average or use the last month’s bill to keep track of the amount.

4.      Take your income less your fixed and variable bills. Subtract your bills from your income and see how much “discretionary” funding you have available. The amount you have left will determine how you should proceed with your budget.

5.      Credit Card debt. Always list your credit card debt as a bill last. It is important to understand the negative impact of credit cards. Depending on your financial situation, you may only be able to pay the minimum payments from your available funding. If you have more money after you pay the minimum payments, then put more towards your credit card debt to help pay it off sooner.

6.      Savings. After paying your bills and credit card debt, the rest can be put to whatever savings strategy you are pursuing.

Creating a budget is that simple. It doesn’t require complex excel knowledge, a mathematics degree or expensive apps. If you get a promotion, you can quickly see the impact so you can increase your credit card payments or your savings. If you get into financial trouble, you can start reducing how much you pay towards your credit cards or you can put more money towards your variable bills. One quick tip: Don’t round your bills. People who round their bills, miss an opportunity to focus fire on financial objective. That being said, here’s a sample budget.

Income (Step 1)	Fixed Bills (Step 2)	Variable Bills (Step 3)	Income – Bills (Step 4)	Credit Cards (Step 5)	Savings (Step 6)
$5,000	-$1,500	-$500		-$200
	-$750	-$250		-$150
	-$250	-$200		-$75
$5,000	-$2,500	-$950	$1,550	-$425	$1,125

How to Pay Off Student Debt

Some experts argue that the next financial bubble will be from Student Loan Debt. In 2011, the Fiscal Times reported the student debt bubble at $2.3T.[1] Many people have a disproportionate amount of debt compared to their potential income. “Going to college” has become a socio-political nightmare for political, private and ideological reasons. The military has its Tuition Assistance programs and the Montgomery GI Bill/Post 9-11 GI Bill, but our dependents, family members and friends may still struggle with their student loans.

Paying down your student loans can be confusing, but here’s my recommendation on how to pay them down quicker using the “Snowball” effect. First you must identify what type of loans you have, then pay down the interest bearing loans by lowest balance first and lastly finish paying off the non-interest bearing accounts.

Identify the types of loans you have: There are many types of loans given to college students. Some are subsidized by the government with adjustable or fixed rates and some are issued by the state or privately by the college. The first step is to identify which loans are interest-bearing and which ones have adjustable interest rates. Some loans, for those in the medical and legal fields, are adjustable by the amount of income you make. If this is the case, then you can find ways to lower your adjustable gross income like maxing out a Traditional IRA (vs. a ROTH IRA). Read more about the difference between a Traditional IRA vs. a ROTH IRA here: Traditional vs. ROTH

Pay them off in order of smallest to biggest balance: Start with your smallest balance interest bearing loans and put any extra in your budget towards that loan and then pay the minimum payment on all other loans. As each interest bearing loan balance is paid off, you “roll” that extra payment into the next interest bearing loan with the next smallest balance. This creates a “Snowball” effect as each paid off loan’s minimum payment gets lumped with the next minimum payment and the debt will be paid off faster.

Non-interest bearing loans last: If you have non-interest bearing loans, then keep those to the last. Pay the absolute minimum payment or defer them if possible until last or until you have a job to make the minimum payments. Don’t feel rushed to pay these off because “investing” your money anywhere else would yield you a better return.

My wife attended the University of Phoenix and received a Health Care Administration Bachelor’s degree. The loans totaled to almost $40K. She spent the next seven years raising our two kids. Now that both of them are school aged, she started paying them off using this technique. She was able to eliminate all the interest-bearing loans and then deferred/forbore the rest until she just recently got a job as a heath care administer and thus inspired me to write this blog post.

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[1] https://www.thefiscaltimes.com/Articles/2011/05/09/Rising-Tuition-Student-Loans-Education-Bubble

How to Make a New Year's Resolution

Have you tried to make New Year's Resolutions in the past?  Is the resolution a financial one or a health one?  Does the resolution only last 3 days, 3 weeks or only 3 months?  Don't worry if this happens to you because it happens to a lot of people.  The secrets to making a New Year's Resolution a success are to make more than a one-sentence resolution and keep yourself accountable.  These steps are similar to my How to Set and Complete Financial Goals blog post.  Here's an example of a proper way to execute a financial New Year's Resolution.

Resolution:  I want to become debt free in 2014.  This is where people usually stop.  They may cut some spending the first couple of weeks but then they lose motivation and the New Year's Resolution disappears.  You have to create some short-term goals and a timeline like the one below:

• Goal 1 - Identify which debt sources should be paid off first.  Always start with the smallest balance and then work your way up, using the free balance from the first source to go after the next, bigger source.  If balances are the same, then go after the one with the highest interest rate.
• Goal 2 - Divide the total, or the amount of debt you want to reduce by, 12 months.  If you owe $12K, or want to reduce your debt by $12K, then you should shoot for $1K a month.
• Goal 3 - Get your calendar out and mark each quarter and write it down.  Every two weeks, or every paycheck, remind yourself about the Resolution consistently.
• Goal 4 - Make yourself accountable.
• I always recommend using Facebook, Twitter and/or Instagram.  On January 1st, download little images you can post each month or each milestone so you always see what you were supposed to do when you look in your Pictures or Documents folder.  Post it on Facebook and ask your close friends to keep you accountable.  If it's a health goal than you should post progress pics as positive attention is addicting.
• Make sure your spouse, if applicable, is on board and talk about it frequently with others.  Then when they see you next, they will ask you about how you are doing on it.
• On a notepad or a Word document, write your January 1, 2015 Facebook post telling everyone that you stuck to your 2014 New Year's Resolution.  Read it frequently.

You can start out by leaving your New Year's Resolution on this blog so we can keep it together.

The Secret to Personal Finances

Once you understand the secret to personal finance, you will look at the world differently.  Financially independent people learn the secret early and continue to use it throughout their life.  Notice how I don't use the adjectives "rich" or "wealthy" people.  Just because you are rich or wealthy doesn't mean you are financially independent.  Financially independent means you have the means to live within your means and self-sustain at current income levels for long periods of time.  The secret to personal finances is understanding RETURN.

I remember being in my early twenties and becoming debt free and feeling like I was on top of the world.  After the excitement wore off, I realized that I still wasn't financially independent.  It is then that I realized that debt used correctly, also known as leverage, can RETURN you more money than being debt free.  Consider acceptable levels of student loan debt, a house loan or investment debt. Financially independent people utilize debt to get more RETURN on their money than debt-free people do.

Anytime someone asks me for financial advice I look at the maximum RETURN on every dollar they are asking me about.  Some people automatically assume that I will recommend paying off any debt before doing anything else and then are surprised when that's not always the case.  For example, you can buy a stock paying dividends at 3% or a 30-year bond for 3.6%.  If you have debt that is at 2.75%, then I would recommend you let that debt ride and invest in the dividend-paying stock or the 30-year bond and make the .5% plus difference.  Or if an employer offers a 5% matching retirement contribution, it would make sense to do that than to pay off debt at less than 4.9%.  Conversely, you should pay off debt at higher interest rates than you could find in any investment type.  If you use this scenario to guide every decision and let the secret of RETURN guide you, you will become financially independent.

Whenever you spend a dollar, you must consider the RETURN on that dollar.  I struggle with spending money correctly; or spending in general rather.  Some sort of survival mechanism kicks in from my past and it's difficult for me to let go.  A $20 fun day with your family can have a greater intangible RETURN than saving that money.  Going out to dinner as a family every Sunday can provide more intangible dividends that just being at home or having my kids spend more time with friends than with me.  And the cliché, "A happy wife is a cheaper wife" is a cliché I totally agree with.

Understanding personal finances is like playing a board game without knowing all the rules and players that have been playing for a long time (the government, banks, corporations) know all the rules.  Understanding the concept of RETURN can be difficult at times, but that's why this blog is here and that's why I'm here to help.

3 Steps to Stop Living Paycheck to Paycheck

I know a lot of people, especially the junior enlisted, are quite literally living paycheck to paycheck.  After all their bills are paid, they almost have no money for anything else.  Any entertainment or unplanned expenses go on credit cards and starts the path to bankruptcy, depression and/or divorce.  Every day that passes like this makes it harder to recover from.  Their only option is to start today and get out of the negative cycle.  Here are 3 steps to stop living paycheck to paycheck:

1. Get back to zero.  The first and most important step is to get back to zero.  Track what you spend everyday and see if there are small changes you can make to get back to zero.  If you make $2K a month ensure that you only spend $2K a month.  If you are using your credit cards to supplement your income, then you will never get out of your situation.  The interest on your credit card will slowly keep increasing and your minimum payments will keep increasing.  This negative feedback loop will eventually bankrupt you the second you don't have access to new credit.  Mathematically, you can't do anything else until you get back to zero.
2. Micro-invest.  The next step is to start getting out of debt.  You can either pay the minimum payment until a credit card is paid off and wait for months or years for that to happen.  Once the credit card is paid off, you will eventually have a little more flexibility to stop living paycheck to paycheck.  A better option is to track everything you spend for 30 days and, I can almost guarantee, you can find $25 a month in places you can cut.  Put this extra $25 with your minimum payment and the math behind the compounding interest will be in your favor.  You can cut off months from paying off that credit card and finally have some flexibility from living paycheck to paycheck.  Moving small amounts of money is called micro-investing and can be very powerful for those not making a lot of money.
3. Focus fire.  Make sure you aren't rounding up on all your payments.  For example, someone has a $246 car payment and they put $250 a month towards it; a $56 minimum credit card payment and they put $60; etc.  It's better to tally up all those extra cents and dollars and focus them on paying down a credit card.  It's a mathematical principle why it's important to focus fire on your money.  Start by paying off the smallest balance and keep rolling those minimum payments to the next smallest balance.

If you are beyond the help of these tips, it's best to see your First Sergeant to see if they can help. Self identifying a problem is a courageous act.  If you're a civilian, try seeking help from your local church, friends or family members or a professional money manager.

USAA Career Starter Program

Have you heard about USAA's Career Starter loan?  It is a "signature" loan (meaning no collateral down) for officers about to graduate from a commissioning program.  The max amount of the loan is $30K and the interest rates range from .5% - 2.99% and payments are deferred for 6 months after your commissioning date.  A common question is, "Is the USAA commissioning loan a good idea?"  As always, there are two sides to a personal finance decision: the economical and the emotional.  Here are my thoughts:

This USAA Career Starter Loan is an excellent economic decision.  It's the lowest interest rate you can find on a signature loan.  When comparing a loan versus cash decision, you must use the "Rate of Return" to help guide you.  One of the smartest things you can do is to pay down any debt you currently have; i.e. other student loans, credit card debt or a car loan.  Most consumer debt ranges from 5-25%, so consolidating them into a .5-2.99% loan could save hundreds and/or thousands of dollars.  Another option is to only use enough to purchase a car which would cut the interest payment in half of what a normal car loan would have been.  Another option would be to invest in something that earns more than 2.99%.  Either way, this "cheap source of money" could be utilized very effectively.

The other side to a personal finance decision is the emotional side and the one I used to make my own decision.  I graduated Officer Training School in 2009 and in 2009 I had been debt free for 5 years and wanted to keep it like that.  I love the feeling of being debt free and it is worth more to me than some small percentages of return if I had chosen to invest it.  If I lost money investing it, I would have increased my losses because I would still owe that money back plus interest; albeit, a low interest rate.  Another emotional factor comes from those who know they can't handle debt.  If you are living paycheck to paycheck, then adding more debt, regardless of the interest rate is not a smart move.  You must know your self and your own debt/risk profile.

5 Tips to Increase Your Credit Score

Here are 5 tips to increase your credit score.  Some people get a pay raise, a new job or get some extra cash and want to know how to increase their credit score.  These tips should help and I'll post more about each one in detail later.  Increasing your credit score could save you hundreds, thousands or hundreds of thousands of dollars in your future.  A small investment of time and money now may pay off big time both financially and emotionally.

1. Keep good standing with all current debts - You can't change the past.  If you are struggling to make ends meet, then you should stick with this step until you have some extra money to tackle previous debts or trying to increase your credit score.  Your credit score weighs the most recent activity higher, so keeping good standing with current debts will maintain or increase your score more than going into past credit troubles.
2. Make sure your credit reports are accurate - There are a number of reasons why there maybe something incorrect on your credit report.  Go to www.annualcreditreport.com and get your free credit reports and make sure everything is accurate.  If something is wrong, the credit bureau should have a phone number to challenge an item.  I'll tell you upfront that it's not easy to change something and the burden is on the member, not the company who did something wrong or a person that may have used your identity.
3. Pay off any outstanding prior debts - Now that you have your free credit reports, you can try and pay off anything you may have in collections.  Call only one agency at a time because collection agencies are aggressive.  If you have a lump sum, then great, pay it in full.  If you want to make payments, then call the collection agency and be firm.  Use ultimatums like, "Take this payment plan or else I'm walking away."  They may threaten to garnish your wages, but they won't because you calling them to make payments debunks any legal case against you.  Also, try the old "Let me talk to your supervisor" line to make payments.  Go in order of smallest balances so you can get it off your record sooner.
4. Maximize your score - If you have nothing in collections, your credit reports are all accurate and you are current on everything, then it's time to maximize your credit score.  Credit scores are made from "corrupt" math that us humans have decided to make to oppress other humans.  Sorry, that's a little of my own ideologies coming out.  But really, it helps to get help from the source with credit scores.  I recommend going to www.myfico.com and paying $14.95 for their credit report & score.  At the end of the report, there are summaries, tips, recommendations and simulators that you can use to maximize your credit score.
5. Get professional help - Sometimes getting professional help is the best way to increase your credit score.  For military members, USAA offers great free financial advice. Most Airman Family Readiness Centers (or whatever other non-Air Force services call it) have trained or certified financial planners that give free financial advice.  Other civilian-based companies may charge for an hour or two of time.  Either way, sometimes professional help is a great investment.