You can’t save your way to a million dollars

There’s a common personal finance saying that’s incredibly relevant to military members and it’s, “You can’t save your way to a million dollars.” You simply can’t stash your money away in a simple savings account earning less than 1% interest—you must invest your money in a way that earns a positive rate of return. The decision not to invest can literally cost you hundreds of thousands of dollars.

I calculated a non-prior enlisted officer’s 20-year pay chart, excluding BAH (explained in the assumptions below), at different savings rates and different annual returns. To reach a million dollars at 20 years, an officer would need to save 20% of his or her paycheck for 20 years, at a 12% annual rate-of-return, and then he or she would have approximately $1M. If you save 50% of your paycheck and choose not to invest it, after 20 years you’d only have $785K—a loss of nearly $225K AND I imagine that almost no one can reasonably live off only 50% of his or her paycheck. 

For most of us, a 20% savings rate at a guaranteed 12% return rate is unlikely—closer to improbable. After 2 decades of helping people with finances, it’s difficult to convince people to save at least 10%. While reaching $1M at 20 years is an aggressive goal, reaching $1M by 65 is definitely attainable for ALL of us.

You may not become a millionaire by saving for 20 years, but you’ll set the foundation for guaranteed millionaire status during retirement by following these recommendations:

• Start Right Now – Unless this is your first day in the military, then you may already be behind the power curve. My assumptions track an officer starting to save the first month of his or her active duty. If you’re saving 0% right now, then try going to MyPay and at least put 1% towards your TSP. I can almost guarantee that 99% of people can live without that 1%.
• Increase Your Savings Rate – Probably the one step that’s mostly in your control, is to increase how much you save. Assuming a 10% annual return, a 10% savings rate after 20 years, would give you $426K, while a 20% savings rate with a 10% return would give you twice the amount of $852K. Considering the “real” inflation of nearly everything we buy, we must consider saving more than 10%.
• Increase Your Rate of Return – Keeping your money in cash will cost you thousands of dollars in just 20 years. At today’s interest rates, most banks pay less than 1% in interest, compared to 4-12% that many Total Stock Market mutual funds are able to return. The difference between a 10% savings rate at 1% at 20 years and 10% in 20 years is nearly $254K ($426K vs. $172K). By the time, you’re 65, the difference will be several hundreds of thousands of dollars. To increase your savings rate, I typically recommend that investors under 55 should be invested in Vanguard’s or *Fidelity’s Total Stock Market mutual funds. If you’re in the TSP, I recommend getting out of the “G” fund (the default fund) and move into the appropriate LifeCycle funds.
• Make Your BAH Work For You – In my assumptions for calculating the rate of return, I purposely did not include BAH because you must choose to make it work for you, and it’s not always entirely within our control. When you correctly use your BAH (by buying your homes or renting less than your rent and utilities), the portion that is going to buying down the principal or excess BAH (if renting) should be added to your savings rate. If you save $800/month in investments and $200 of your mortgage payment going towards principal or excess rent, then you’re actually saving $1K. If you rent above your BAH or live on base, then $0 can be counted towards your savings rate.

BL:  Not saving, or just putting your money into a savings account will cost you hundreds of thousands of dollars and will force you to work well into your retirement years. You can’t save your way to a million dollars—you must invest it. Start today, save more, invest better, and consider making your BAH work for you. You can easily have $1M by the time you retire.

Assumptions:

• My assumptions did not include the “theoretical value” of our military retirement because that’s dependent on the interest rates (or inflation rate) when you retire. I’m simply looking at how much extra you could earn by investing your money versus just saving. You can see the “theoretical value” of a military retirement here.
• I used standard promotion rates (a.k.a. “In the Zone”[Air Force]) to calculate future savings rates. There will be variances. For example, I know Marines promote to O3 (Capt) later than other services which would impact the calculation rates.
• I did not include inflation, because this is a simple calculator. But it’s worth noting that inflation will destroy your savings even further if not properly invested. As such, all future promotions were based on the 2016 Basic Pay Chart.
• As already explained, I did not include BAH rates in my calculations. There are too many probabilities that would prevent an apples-to-apples comparison of saving and investing.
• I didn’t calculate all the way until 65 on purpose. 1) My goal is to help people retire by 55 and 2) A twenty-year career is easier to grasp than a 65-year old goal. It’s hard enough getting people to forecast 30 days into the future, so I try to keep it simple.

*Full Disclosure: After nearly 15 years of inconsistently beating the stock market, I’ve put most of my portfolio in Fidelity’s Total Stock Market mutual fund (FSTVX).

Click Paralysis - Start Your Financial Journey Now

While deployed, I tried to motivate people to reach their financial goals with their deployed entitlements. They left my office with motivation and excitement, but by the time they got to their office, they had lost all motivation. I gave them a lot of options and ideas to think about and, instead of empowering them to start, it created paralysis.  I think most people just want to be told exactly what to do. So against my own philosophy, I created this post with the most vanilla information to jump start your finances.

Disclaimer:  No matter what I write, please do your own research. There are a lot of variables you need to think about, but I know those variables are what causes the paralysis, so each recommendation will be followed up with more research to do if you choose to.  This post also assumes that you have little to no debt.  If you have too much debt, then get rid of it first.

1.  Start an emergency savings account.  Go to CapitalOne 360 and open an account using this link.  Start the account with more than $250, and this referral link, and we both get $20 for opening a new account.  You should put no less than $5K and no more than $10K in it.

• For more research, go to www.bankrate.com and look for the best savings account to get the highest yield for your cash.  I know for sure CapitalOne 360 is no longer the type yielding savings account.  You should have 6 months worth of expenses saved up, so the $5K-$10K is just super generic.

2.  Start a ROTH IRA.  Go to www.fidelity.com or to www.vanguard.com.  You can put $5,500 a year into an IRA ($11K a year if married, regardless of spouses employment).  Once the money is in the account, put all your money in FSKTX (VTSMX for Vanguard).  Once you have over $10K, you'll be automatically enrolled in FSTVX (VTSAX) for Vanguard.  Contribute to FSTVX (VTSAX for Vanguard) every year, reinvest all dividends, and don't sell out until retirement.

• Both companies offer Total Stock Market mutual funds with different performances and fees.  Also, depending on your age and personal tax situation, you'll need to decide if a ROTH or a Traditional IRA is the right thing for you.  Lastly, you'll need to determine your risk profile to see if a pure stock portfolio is the right risk allocation.  MOST people would benefit from just sticking to the Total Stock Market mutual funds listed above.

3.  Military members, start your TSP.  Go to Mypay (https://mypay.dfas.mil), figure out how much you can afford a month, and then start contributing.  Then go to www.tsp.gov, sign up, get your PIN [can take 30 days], log in, and put all your money into a Lifecycle fund that matches when you want to retire from work (not the date you plan on retiring from the military).

• Not many people have money left after starting an emergency fund and maxing out an IRA.  If you do, then that's great, so you'll definitely want to take advantage of the TSP.  You don't want to put 100% of your money into retirement accounts so you can save for short- and medium-term goals.

4.  Civilians, max out your 401(K) matching contributions.  Find out how much your employer matches for your 401(k) and then contribute enough to get the max matching contributions.  It's free money.  Just walk into your HR department and they'll give you instructions.

• Just like for military members, you'll definitely want to make sure you're not putting 100% of your savings into retirement accounts.

5.  Go to your emergency savings account bank and open up a new bank account for your short- and medium-term goals.  Regularly put money into these accounts.  An example of a short-term goal is a vacation.  Open an account called Vacation.  Decide how much and by when you want to save it and start putting money into the account.



Hopefully I helped take some of that click paralysis away.  Just do exactly what I wrote here and you'll be ahead of 90% of the population in your income bracket.   

529 College Education Plan

529 plans are tax-deferred accounts used to pay for college expenses for a beneficiary (usually a child/grandchild) ran by states or education institutions. An investment in a 529 plan is invested in stocks and bonds and will grow tax free until the beneficiary is ready to use the money. The deductions are tax exempt if used for qualified college expenses. For the most part, 529s are a great way to save for your child’s college education but there are some considerations to think about before investing in one.

Benefits:

·         Tax Advantages: If you’ve read more than one article from my blog, you know I’m an opponent of taxes and I focus on helping people pay the minimum amount of taxes as possible. The money you invest in a 529 will grow tax free and when your beneficiary is ready to use the money for qualified college expenses, the earnings will also be tax free. 529 contributions are considered gifts so you’ll be maxed out at $14K a year in annual contributions to a 529.

·         Better Returns: 529s plans are run by States and in most cases have better returns than a simple savings account or treasury bonds. A parent starting a 529 when the child is born has ~18 years to save for the child’s college education. Some states do extremely well and provide amazing rates of return.

·         Realistic Program Management: Unlike most programs designed by the government, the 529 program is realistic and versatile. For military members this is especially important because you can switch 529 programs state to state depending on which state you live or are stationed in. You have an opportunity in picking which state has a better rate of return. For all parents, the 529 can be transferred from family member to family member. If one child doesn’t use it then you can pass it to another child or to a grandchild.

Considerations:

·         Sole Purpose: The sole purpose of a 529 plan is to help pay for a beneficiary’s college education. If you’ve saved more than the cost of a college education and have to liquidate the account then you will be penalized. If your child chooses not to attend college or receives a scholarship then you will have to liquidate and be penalized. The penalty for not using the funds for qualified education expenses is a staggering 10% so, if possible, only save enough for the education your beneficiary(s) can use.

·         Financial Aid Concerns: I try not to expose my political ideologies on my blog but financial aid and social programs are being abused by many people and not for its original intent. Financial aid for college is a common place to find such abuse. Many abusers receive more social welfare money for going to college and use financial aid with little intent on graduating college. For those parents who tried their hardest to save for a 529 but will still look for financial aid for their child, may be impacted in getting financial aid because the 529 will be part of the parent’s “net worth” calculation (a.k.a. Expected Family Contribution[EFC]) even though the 529 can only be used for college expenses. A 529 isn’t necessarily a part of the parent’s wealth as it is used for in the EFC calculation.

·         Limited Investment Options: I mentioned above that 529 plans have better returns than a savings account or treasury bonds but there are still limited investment options. You are limited to the State ran 529 plan for the State you choose. Some states offer deals for their own residents but the options are still limited.  

·         Post 9/11 GI Bill: The Post 9/11 GI Bill allows military members to transfer up to 36 months of education benefits to a family member. I received my Bachelor’s and Graduate’s degree using the Montgomery GI Bill (pre-9/11 GI Bill) and haven’t used any of my post 9/11 GI Bill benefits. I can transfer all 36 months to my children (though it comes with a 4-year Active Duty Service Commitment). So going back to the sole purpose consideration, be careful how much you invest if you’re planning on using the post 9/11 GI Bill for your child. You may have to liquidate more than expected and get penalized 10%.

529s are basically run like mutual funds. My #1 choice for all information on mutual funds is Morningstar.com. They have a great 529 Center on their site here: http://529.morningstar.com/state-map.action

Be careful when you’re doing a simple search for 529 information.  Some of the State-ran plans are worth several billion dollars and it’s a big business. Like all investments they want your money so a lot of Google searches will be advertisement-based over research based. Like I said above, I use Morningstar.com to search through 529s.

2014 Year in Review and 2015 New Year's Resolutions

Every year I create financial goals to help guide me through the year. I first read this quote when I started my fitness journey regarding meal preparing, "If you fail to prepare, then you are prepared to fail." (Unknown). I think this is relevant in any goal management, but especially with financial goals. Here's a sneak peek at how I managed my finances in 2014.

• Max out Individual Retirement Account (IRA) - In 2014, the limit was $5,500. This is always my first goal and I've been maxing it out every year for almost a decade. This is my first goal in 2015 as well. I use Fidelity to manage my IRA; if you're interested in starting a Fidelity account please let me know so I can refer you. In 2014, I met this goal.
• Put $XXK into my "high-yield" savings account - This is my emergency savings account. I'm expanding it beyond the 6 months of bills (the typical advice) to add 12 months of bills for my new house. My goal is to have the ability to absorb a whole year of not having a renter when we PCS and have to rent this house out. Some of the increase will also be for a new car in 1 1/2 years. I use CapitalOne 360 (the bank that bought ING Direct) for my "high-yield" savings account; if you're interested in starting a CapitalOne 360 account please let me know so I can refer you and we both get money. In 2014, I met this goal.
• Save at least $XK from each paycheck - Ever since I was an E-4 I've been creating this goal. No matter how hard you plan, you'll always have unexpected costs throughout the year. For this goal, I'm focused on the end goal so if I can't save the goal from one paycheck, I'll make sure I save a little more from a future paycheck. But this gives me an average savings goal from each paycheck and allows me to see if I'm exceeding my goal or not meeting it. In 2014, I met this goal.
• Increase dividend income by X% to $XK - One of my retirement goals is to supplement the amount I lose by retiring with dividend and interest income by the time I retire from the Air Force. This is a lofty goal and I may need several years after Air Force retirement to achieve it. Nonetheless, I try finding better return rates on my investments to achieve this goal. One of my new investments this year was Lending Club. They offer loans ($35K or less) to people and investors can contribute $25 increments to their loan so it spreads the risk while offering a better yield. By playing it safe, I earned a 9%+ return on investment this year. If you're interested in starting a Lending Club account please let me know so I can refer you and we both get money. In 2014, I DID NOT meet this goal. I was very close but missed the goal by less than $200. I'm not too worried, but next year I would like to say I exceeded the new goal I set.
• Net Assets of $XXXK by the end of the year - This is just an overall goal. I don't focus on how much I have saved total. I focus on what the money is doing and what return on investment I'm getting. People focus on a round number like $1M without figuring out what their going to do with it once they get there. Most rich people don't even care how much total they are worth, they only care how much money it's earning so they can use it. Either way, it helps me focus and ensure I'm earning a decent of return on investment. In 2014, I DID NOT meet this goal. I tried to do some ultra-risky investments to help my wife pay off her school loans and they all back fired on me. I lost a lot of money this year on those investments and it stings pretty badly. My house equity didn't rise at all either like I had expected. In fact, I manage my Dad's IRA and it's pretty conservative and safe and he crushed my returns this year.

These goals are specific to me. If I had debt-management goals, then those would be near the top. If I didn't have an emergency savings account, then that would've been my first goal. What are your goals for this year? If you need help or are interested in being referred so we both get money please leave me a comment or e-mail me at bjone6 @ gmail . com (spaced out to prevent spam bots).

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

Make Money With Me!

One of the most important steps in financial planning is to ensure you have an emergency savings account.  If you have trouble saving, then putting your money into another account that has a time delay in getting access to your money is the best advice.  I use CapitalOne 360 (formerly known as ING Direct).  It takes a couple of days for your money to be available and another couple of days to get your money transferred back to your account.

If I were to need to dip into my emergency savings account then I would put the expense on my credit card and withdrawal the money back into my normal checkings account to instantly pay off the credit card.  All interest rates are low in the country and CapitalOne 360 is currently at .75%.  You can find higher interest rates at several banks and you can always check the rates using www.bankrate.com.  Make sure there is $0/$1 to open and no annual fees.

An emergency account should be 3-6 months of all your expenses.  Emergency requirements are usually where financial troubles start; whether it be your car broke down, some medical expenses or any other unexpected requirement.  People will use credit cards or worse, pull money out of retirement accounts and end up paying interest and/or taxes and the unexpected requirement costs even more.  When people are strapped, these emergencies can be the breaking point.  Before saving for retirement or even reducing debt, it is important to have an emergency savings account that earns interest.

When I first started using ING Direct, they were consistently rated 5 stars and were in the top 5 highest interest rates.  I've been with them for a very long time and the interface is super easy.  They are still rated 5 stars on Bankrate but their interest rate is lower than some other banks.

If you have $250 to start an emergency savings account and are interested in starting your emergency savings account with CapitalOne 360, then please use this link to sign up.  https://r.capitalone360.com/V1AVDPYTUb You will get a $20 sign up bonus and so will I.  Remember, you need to open the bank account with at least $250.

The Secret to Make More Money with the TSP

The Thrift Savings Plan is meant to be a retirement investment.  When investing with the TSP, you should have a long-term outlook.  That being said, it's still essential to want to make the most money as possible with it.  The secret to making more money with your TSP is to START NOW!

Time is the single most important variable on determining on how much you saved in retirement.  The sooner you start, the more you will have when you retire.  Most people wait for an arbitrary time to start saving money or dieting or making a positive lifestyle change.  The more time they wait, the harder it will be to achieve their goal.

The next time you are at your work computer, log into your Mypay (https://mypay.dfas.mil) account and increase how much you are currently saving.  If you are investing in the Traditional TSP, then up your percentage by 1% and then in a month or six months see if you can increase it by another 1%.  If you are investing in the ROTH TSP, then increase it by $25 or $50 a month and then in a month or six months see if you can increase it by another $25 or $50.  If you don't know the difference between the traditional or ROTH TSP, then read my article I've written: Traditional TSP vs. ROTH TSP. 

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.