Financial Tips for Soldiers
In my past articles I have advocated that soldiers should start a savings plan that focuses on index funds, and they should work towards a long range goal of purchasing rental properties. I’m sure many people may think this sounds too simple to be true, and in some respects they’re right. To reach your long term goals you will need a well-defined strategy. Allow me to elaborate on this subject.
The strategy I’m speaking about starts with a very specific dream. The more specific your dream becomes the more likely it will become a reality. You should try to VISUALIZE what your future rental properties will look like, and where they will be located. Will your future properties be duplexes or multi-dwelling apartments? Will your properties have 2 or 3 bedroom apartments? Most importantly, you should determine when you will purchase your properties. Keep in mind, once you set a deadline on your dream it’s no longer a dream. At this point it becomes a goal.
As you make goals be sure that they are “SMART.” In other words your goals should be Specific, Measured, Attainable, Realistic and completed in a Timely fashion. I have already emphasized the need to be specific, but you need to do your homework and determine if your goal is realistic and attainable. How much will you have to save each month? What is your likely rate of return? How much money will you need to cover the down payment and closing costs on a rental property? Based on your monthly savings and future returns how long will it take to build up enough money to cover the closing costs? Once you have this type of information you are ready to finalize your goal by setting a realistic deadline that’s written in stone.
Divide & Conquer:
Let’s say you’re standing at “Point A” and you want to be at “Point B” in no later than in 5 years. This is a good starting point, but once again, you must be more specific. How much money will you save every month? Where will you be in the 1st, 2nd, 3rd and 4th quarters of your first year? How much savings will you have at the end of years 2, 3 and 4? This is what I mean when I say you need to divide and conquer. It’s also what I mean when I say your goal needs to be measurable and timely. This dividing process creates smaller “target goals” that helps you stay on the right path.
With all of this information in mind, if you are saving $500 monthly you know you will roughly save $1,500 every quarter. You also know you will have roughly $6,000 at the end of year #1. Therefore, you will have $30,000 at the end of 5 years (if not more due to your annual returns on investment.) Since you need roughly 20% as a down payment and 5% in closing costs to purchase a rental property, you know you will be able to purchase a property that’s in the $120,000 range at the end of 5 years.
Information such as this allows you to know what is realistic and attainable. Can you realistically purchase a duplex in your desired area for $120,000? If the answer is no then you need to increase your monthly savings, or increase the years you will have to save. If the answer is yes then you need to ensure you have the discipline to follow through and religiously save $500 every month. You need to ensure you will do everything within your power to reach each of your target goals. This type of strategy helps you know when you are progressing in a TIMELY fashion. If you are where you want to be at the end of the 1st year, most likely you will hit your 3 year target goal. Likewise, if you reach your 3 year target goal, you are in a great position to attain your 5 year goal of purchasing a property. If this is not the case, you know you must take corrective action. Perhaps you need to cut back on your personal spending and save more. Perhaps you or your spouse needs to take a second job to generate more savings. By dividing your long range objective into smaller target goals, you will have a better idea about what you will need to do at the present moment.
What I have just described above is known as a savings strategy. Similar to saving strategies there are many different types of investing strategies. These strategies will help you grow your savings and shorten the length of time it will take to reach your long range goals. On the other hand, failure to have a good investment strategy could result in financial losses and completely derail your long range goals. With this in mind, let’s look at some of the most common types of investing strategies.
Dollar Cost Averaging:
In all of the articles I have written pertaining to “Financial Tips for Soldiers,” I have advocated saving 10% of your monthly income for investing purposes and another 10% that should be used as an emergency fund. This process of consistently making monthly payments is known as “Dollar Cost Averaging.” It reduces the impact that changing market prices has on your investment. When the market is down you can purchase more shares of an investment because the price is low. When the market is up you have the peace of mind knowing you have earned a profit. The main concept behind dollar cost averaging is that both strong and weak markets offers an opportunity for the investor as long as he or she continues to make monthly investments. Yes, the markets will always bounce up and down in the short run, but historically the direction that all markets travel in the long run is always up. Therefore, if you ignore market volatility and continue to make your monthly investments you will eventually will be rewarded handsomely for your persistence and patients.
Buy & Hold Strategy:
The buy & hold strategy is very simple. Buy into various investments and be mentally prepared to hold them for long periods such as 10 years, 20 years or even longer. Once again, the market is always bouncing up and down in the short run, but it slowly climbs upwards over the long run. Investors that use the buy & hold strategy always ignore market volatility. They simply buy good investments and hold them indefinitely. This is an especially wise strategy for wealth assets such as rental properties that consistently offers steady streams of positive cash flow. In the short run you have rental income, and if you ever sell a property after many decades you will most likely receive a handsome profit.
Milking cash cows and cutting your dogs short:
People who use this strategy make 3 decisions before they buy an investment. First, they determine the price they will purchase an investment. Second, they determine the profit margin they want to earn. Third, they determine what losses they will accept. Once these facts are clarified these types of investors implement their strategy using buying or selling orders. They place automatic orders to buy certain investments at a specific prices, and sell them if it hits a specific high or low selling price. For example, you can place an order that will automatically purchase a stock at $20 per share, and sell it at $18 or $24 per share. The advantage of this strategy is that you can cut your losses short, and you can lock in your profits. In this example we have set the losses we are willing to accept at 10%, and we have locked in our profit margin at 40%. Typically people who use this investing approach try to take advantage of the market’s volatility. They watch prices bounce up and down, and they try to buy low and sell high. I strongly discourage my intended audience from engaging in this behavior. It takes extensive knowledge and experience to “time the market” correctly. In most cases, the average person can’t time the market. This especially holds true for the young inexperienced investors I’m trying to reach in this article.
If you place all of your “investment eggs” in one nest, and it comes crashing to the ground, you will lose everything. On the other hand, if you place your investments into 10 different nests, and one of the nests comes crashing down, you have only lost 10% of your savings. This is what diversification is all about. It’s all about spreading out your investments into many different companies, markets and countries. By spreading out your investments into many areas you face substantially less risk.
Don’t be fooled by misinformation:
The big time players who excel in stocks, bonds or any other markets tend to have “inside information.” Even if you have equal or even higher levels of intelligence as these “big players,” if you lack inside information you will tend to underperform benchmark figures. Unless you have close to perfect information you will consistently underperform the market or industry’s higher tiers. Therefore, the average soldier would be wise to invest in “No Load,” “No Fee,” and low operating expense Index Funds. They would also be wise to start out with broad index funds that include domestic and international companies. This may not be a wise strategy for the wise savvy investor, but it’s a good starting point for an enlisted soldier with little investing experience.
My advice for the young soldier:
1. Use a dollar cost averaging approach by investing 10% of your monthly income in an investment plan and dedicate another 10% of your income to an emergency fund. You can use the money in your emergency fund to address unexpected issues, but you can never liquidate or spend the money in your 10% investment plan. For the rest of your life you should save, invest and roll these investments over into various forms of wealth that offers you steady streams of income. It’s a never ending process of investing and avoiding depreciating luxury items that you don’t really need.
2. Use diversification to reduce risk by investing in index funds. Index funds have diversification built into them by being composed of hundreds or even thousands of companies. These types of investments are composed of many stocks or bonds. Furthermore, you can purchase both domestic and international indexes to expand your diversification. As you grow wiser and more knowledgeable about finance, you may wish to narrow your focus, but as you start out take baby steps forwards. Think broadly and use diversification to reduce your risk. Use broad index funds such as the Wilshire 5000 or Standard & Poor 500. If you are a risky investor invest 33% of your money in a Wilshire 5000 index, 33% of your portfolio in a very broad international stock index, and the rest in a Barclay’s intermediate bond index. If you are conservative, place 66% of your portfolio in a Barclay’s intermediate bond index and the rest into the Standard and Poor’s 500 index.
3. Don’t try to “Time the market.” Ignore advertisements about “Day Trading,” or “Flipping Real Estate.” Don’t look at “short selling” or using “derivatives.” Every day people who are much smarter than you or me lose boat loads of money based on these so-called investing approaches. As far as I’m concern, trying to time the market, or betting which direction the market will go in the short run is simply gambling. Investing is a long process than encompasses many years.
4. Use the buy and hold strategy. Buy index funds and hold them until you have enough money to buy hard assets or real wealth such as income real estate. Once you purchase a rental property that offers steady streams of positive income hold it until it’s paid off. Once you have a paid off a rental property, you will fully understand what I’m trying to communicate about wealth. Most likely you will never want to sell it.
The average soldier doesn’t have much knowledge or experience pertaining to investing, but they have many natural attributes that are very conducive to personal finance. Soldiers tend to have an excessive amount of discipline in their daily duties. They have a higher energy level that’s conducive for building sweat equity. Furthermore, the average soldier regularly uses strategies and tactics. They also set goals and objectives on a regular basis. That’s what soldiers do on a daily basis when they form and execute “Op-Orders.” With this in mind, the average soldier knows how to form to form strategies and set objectives. They also have a mindset that refuses to accept failure, they embrace discipline, and the effective range of an excuse for a soldier will always be “Zero Meters.” With all of this in mind, what the average soldier lacks is the ability to apply what they learn in the military world, and use it for personal gain. Perhaps YOU, as a soldier, should focus more attention to detail on your personal finances. Perhaps you should also focus more attention on your family’s future. Take some time to think about what I’m saying. It could be time well spent.
For reference here are links to my prior posts on Financial Tips for soldiers:
- Part I
- Part II
- Part III
- Part IV