By June Walbert, USAA Certified Financial Planner™ practitioner
You've been fighting al-Qaida and the Taliban for what seems like an eternity and doing it thousands of miles away. In exchange, the military provides a steady paycheck, fashionable clothes, and food and shelter. And, if you hang in there long enough, you stand to earn a pension — for most, at the tender age of 40-something. You're set, right? Not so fast, Ranger Bob.
You have a good deal, but you have to keep up your end of the bargain, too, so all that goodness will continue and extend into your "old soldier" years.
What if you don't? Well, it's true that bad things can happen to good people…like, overloading yourself with debt can cost you your security clearance. Ouch. More about that later.
Use this as a "Foolish" reality check when it comes to managing your money:
1. Know how much you're spending and on what.
I can't stress this enough. I talk about it a lot, but there's a good reason. If you don't get a grip on where your money's going, it's difficult to live within your means and save for goals. Track your spending for 30 days. Sure, there's a hassle factor, but it's worth it. You're in tiptop physical shape, why not be in tiptop fiscal shape? Overspending leads to debt. And heavy debt loads can cause your security clearance to be revoked, suspended or denied. Serving is more fun when you can keep the job you want.
2. Yup, got the contingency fund in place.
This is one of my favorite "Foolish" moves. When you're in the service, having three months of living expenses set aside in a separate account will help deflect life's curveballs. And, sometimes they come at us pretty fast, pretty big. I tapped my emergency fund a couple of months ago when my German shepherd ingested a shampoo bottle. It was a struggle, but he managed. Two operations and $2,000 later, the big lovable lug is good to go. For you, the importance cannot be overstated. An emergency fund will prevent accumulating mounds of debt (see No. 1).
3. Build some tax-free retirement income.
If you spend 20 or more years in the service of our nation, you'll be paid a well-deserved pension that's even adjusted for the cost of living as appropriate. In the civilian world, pensions are as rare as African penguins (yep, that's right, who knew). This is a great benefit, but it's subject to federal income taxes — whatever they happen to be at the time. That might take a 25% or bigger bite out of that retirement paycheck. Ouch. You can combat that by contributing to a Roth IRA today. You deposit after-tax cash (what I often call beer money) into a tax shelter. And then, years — perhaps decades — down the road, follow the IRS' rules and any earnings may be withdrawn tax-free. "Tax-free" has to be my two favorite words. Or maybe it's "on sale" or "happy hour..."
4. Kick into the Thrift Savings Plan.
After 20 years of active service, you'll receive approximately half of your base pay. Really nice, but who lives on half their pay? I don't. Can you? So it makes sense to save for retirement to enjoy the lifestyle you want. I'm a big fan of the Roth IRA (see No. 3). But the TSP is a great choice if you have additional long-term cash to stash once you've fully funded that Roth with a $5,000 annual contribution. The TSP allows you to save income tax money now, but you'll pay later when you make withdrawals during retirement. We're currently in a very low-tax environment, but it's possible that will change. That's why I favor funding the Roth first, TSP second. If autopilot works best for you, turn that on with the Roth or the TSP and watch your savings accumulate. In early 2012, the Roth version of the TSP should be available…now that's a can't-miss opportunity!
5. Don't overpay Uncle Sam, right.
Er, uh, what? I thought he's paying me. Well, that's true. But every two weeks we give him a cut. If you're excited about getting that big tax refund check every year, then you're overpaying. For example, if you get the average tax refund of about $3,000, then you're missing out on an extra $230 per month cash in your pocket, or a Roth IRA, or TSP, or emergency fund. See what I mean? Call me crazy, but I think that's so much better than giving the government an interest-free loan.
6. Are you worth more dead than alive?
I am. That's because I have life insurance. Service members get a whopping $400,000 in group life insurance for a pittance of $28 per month. GREAT DEAL. I suggest everyone consider taking full advantage of that — even if you're single with no kids at home like me. (If something happened, someone would have to take care of my big lug dog!) If you have a couple of little kids and maybe a stay-at-home spouse, then that's probably not enough. Life insurance falls into what financial planners call risk management. You're guarding against a risk that you hope never happens, but if it does, your family is covered. It's meant to pay off a mortgage and any other debt, replaces lost income, etc. In short, big ticket items. According to the U.S. Department of Agriculture, a couple making about $65,000 gross per year will spend almost $250,000 raising a kid to the age of 18 today! Two kids, you say? More? 400K is not enough.
7. Stash cash in the "kiddy" fund.
Speaking of kids, they'll wipe out your wallet in a hurry. A neat thing in the military is that the Post 9/11 GI Bill is transferable to the kids. While it may not cover all the costs of education, it's a big help. Check out the program. But it's smart to set aside a little extra cash for piano lessons, space camp, braces and whatever the GI Bill doesn't cover.
8. Know the score.
Is it 650 or 750? We're talking credit score here and it is likely the most important three digit number in your life — including what the scale says. Your credit score is an indicator of creditworthiness and banks use it to decide if they're going to loan you money and, if so, at what interest rate. You can save thousands in interest on a car loan or tens of thousands on a mortgage, so it's worth your attention.
Remember what Gen. Douglas MacArthur said to Congress in his farewell speech: Old soldiers don't die, they just fade away. I think that applies to every service member regardless of branch, so follow these tips so you may fade away in style.