Financial Tips for Soldiers
This is the fifth and final chapter in the “Financial Tips for Soldiers” series. The subjects we discussed up this this point are as follows:
- I highlighted the basics principles of personal finance that focuses on saving 10% of your income for investment purposes, another 10% as an emergency fund and learning how to live on 80% of your income.
- I stressed the importance of using direct deposit to fund your investment and emergency funds. I also advocate that soldiers should automatically take money out of their hands to increase their discipline.
- I brought up other opportunities such as 529 education plans and Roth 401K retirement plans that could benefit the future minded military family.
- I advocated that young inexperienced investors should start out with stock and bond index funds because they have built in diversification, no loads, no fees, and low operating expenses. In most cases, index funds also tend to outperform most actively managed mutual funds.
- I suggested that your 10% investment plan should be largely made up of stock indexes such as the Wilshire 5000 or Standard & Poor 500 because equities tend to outperform debt instruments in the long run. I advocated that 33% of your portfolio should be invested in a broad domestic stock index, 33% should be invested in a broad international stock index, and the rest should be invested in a domestic intermediate bond index. For those who are risk adverse, I advocated that 66% of your portfolio should invested in a domestic intermediate bond index and the rest should go into an S&P 500 index.
- I recommended money market, short term bond and intermediate bond indexes for emergency funds since bond prices tend to be less volatile than stocks in the short run, and people face emergencies on a regular basis.
- I stressed that young soldiers should use a “Dollar Cost Averaging” strategy where they take 20% on their income, and invest it on a monthly basis in index funds. I pointed out that dollar cost averaging reduces the risks associated with market price volatility.
- I discussed the opportunities associated with duplexes, multi-dwelling apartments and other forms of income real estate.
- I discussed the importance of hard assets, wealth and why soldier should look to find steady streams of positive income that are associated with rental properties. I also mentioned that young inexperienced investors should stay away from raw land, and stick with multi-dwelling properties that provides positive cash flow from the very first day.
- I suggested that soldiers should steadily build up their index funds until it grows large enough to cover the closing costs on rental properties. I believe this is a wise mid or long range goal for soldiers.
- Once a soldier purchases a property that offers steady rental income, I suggested that they use a buy & hold strategy. They should hold their properties until their paid off. Most likely, soldiers will recognize the value of a paid off duplex, and they will not want to sell it.
Now I want to talk about the importance of budgeting. Budgeting makes everything I have discussed possible. Budgeting will help you live within your means, and it can ensure you make your monthly investing and emergency fund payments. So what is budgeting really about? It’s nothing more than a plan. In this case it’s a financial plan that serves as a map or compass. Think about it, you wouldn’t want to travel to an unknown destination without a map, compass or Garmin. This would be foolish, and you would most likely wonder about aimlessly until you were completely lost. Likewise, you don’t want to travel into the future without strategies, goals and a financial plan to guide you into uncharted waters.
The first step when making a budget is to break down all of your expenses into 2 categories. The first category is known as “fixed expenses.” The other is known as “variable expenses.” Fixed expenses remain constant. They remain the same every month while variable expenses are constantly changing. Common examples of fixed expenses consist of rent, mortgages, car payments and cable payments. Common examples of variable expenses consist of utilities, auto expenses and food expenses.
Since fixed costs are so easy to manage let’s start our conversation here. All fixed expenses should be paid with direct deposit. That’s it. It’s that simple. All you need to do is bring all of your bills to your bank, and tell your banker that you want to set up some direct deposits. If you provide the necessary information your banker will do the rest. It doesn’t get much easier than that.
Your banker and some of the companies you do business with can also give you advice on how you can fix some of your variable expenses. Some utility companies offer fixed plans. You can speak with your insurance companies and request a fixed plan. You should insist that all of your loans are fixed. When you purchase real estate you can request a fixed escrow mortgage where your loan payments and taxes will both be fixed. Your 10% investing plan and 10% emergency fund should be fixed. Bottom line, try to make fixed payments on any expense that’s possible, and pay it using direct deposit. This is the fastest, easiest and safest way to pay your expenses.
Since variable expenses are constantly changing they can be challenging to project and pay. This is where the average soldier needs to use discipline. It also explains why I strongly advocate using direct deposit on all of your fixed expenses. Let your bank take care of the fixed expenses, and then you can concentrate the vast majority of your attention on your variable costs.
The first step towards addressing your variable expenses starts with making a budget at the beginning of every month. Determine to the best of your ability how much you will spend on food, clothing, entertainment, gas, automobile maintenance, household repair, utilities, gifts, donations, etc. If you are married discuss these financial matters with your spouse. Collectively work together to set limits on how much you will spend. Once you have set limits on each of these expenses do the math. Add up all of your fixed and variable expenses and ensure that your income will cover it all. Add or subtract from each line item until your expenses matches your income. Allow yourself some room for era by including a miscellaneous expense category. Once your expenses matches your income double check the math. Once you are sure your budget is mathematically correct, look over each expense to ensure it’s realistic and attainable. You don’t want to set yourself up for failure. When your budget is finalized put it into writing. It’s very important to put your budget into writing, and I will soon explain why.
After Action Review:
Most soldier know what an after action review is about because they perform them daily in the military. Soldiers regularly make operation order plans and they perform an after action review once the plan has been executed. An after action review is simply an evaluation process where soldiers determine what was executed well and what fell short of the mark. This is accomplished by comparing planned performance against actual performance. Similar to what soldiers regularly do in the military, after action reviews should take place at the end of the month to analyze the budgeting process. Soldier should review their written budget and compare projected and actual expenses. Try to determine where you made good and bad projections, and learn from your mistakes. Also try to determine if you failed to meet your projected goals based on bad projections or if you simply lacked discipline. If the error was a matter of making unrealistic projections simply adjust your figures. If you feel you should have met your projected expense figure, but you lacked motivation, take corrective action. Roll up your sleeves, tighten up your belt and change your life style. Keep in mind that it’s very important that you learn to live within your means. Most likely, if you consistently perform monthly budgets and use after action reviews, you will eventually make the necessary adjustments. Over time you will slowly adapt to this way of life, and it will take little or no effort to live within budget.
Christmas, Vacations & Special Occasion Funds:
Big celebrations such as Christmas, vacations and weddings can wreck budgets. Other events such as clearing CIF and attending military schools such WLC can also drain your bank account. Therefore, be proactive and set a small amount of money aside each month for these events. Get ahead of the game and it will hurt less. If you save in advance for these special occasions and maintain a 10% emergency fund, you shouldn’t have any problems managing your money well.
Other Financial Tips:
- Avoid using credit cards to the best of your ability. Debit cards have less expenses, lower fees and they help you live within your means. Credit cards tend to charge eight to twenty one percent interest rates, and they have many hidden fees. Nothing brings more soldiers down than credit card abuse.
- Try to pay for vacations and depreciating items using cash. Only use loans to pay for appreciating assets such as real estate. I recognize this is not always possible, but strike to work towards this goal.
- Keep your debt equity ratio at 28% or lower. Never exceed 35% of your income. To determine this ratio divide your monthly loan payments by your total monthly income.
- If you are interested in life insurance buy term policies and avoid whole life. Term policies are pure life insurance. Whole life is composed of an insurance policy and an investment. The investment part of a whole life policy typically underperforms the S&P 500 index, and the insurance is also overpriced.
- If your 10% emergency fund exceeds your annual income take the money that exceeds your annual income, and put it into your 10% investment plan. If your annual income matches your emergency fund savings, you are very well protected.
- If your 10% emergency fund is growing too large or if you have no problem saving money, look at 529 education funds or a ROTH 401K retirement plan. These types of investments reduce your taxable income, and it helps you prepare for the future.
- Once your investment plan is growing quite large roll it over into income real estate. Purchase hard wealth that offers steady streams of income.
- Keep your hands off of your rental income. Plow this cash flow under, and continue to live on 80% of your working income. Once again, you should never use your 10% investing plan for luxury items or for person spending on depreciating items. If you must do it, wait until you’re fully retired in the golden years of life.
- If you are really ambitious, business savvy and you are a high risk taker, you can use your 10% investing plan to start up a business. A successful small business is a cash cow or goose that lays golden eggs. It can be a very valuable piece of wealth, but keep in mind all of the risks that are involved. Only 1 out of 10 businesses survive the first year of operations. Obviously this is a high risk venture that only the most business educated people should undertake.
- Get into the habit of reading books on personal finance and investing. Read financial magazines such as Money and Kiplinger’s. Make like a sponge and absorb as much financial knowledge as possible. This may be the best advice I have offered you.
- Rich Dad Poor Dad (Accounting, Philosophy, & Strategy) Robert Kiyosaki ***
- As a Man Thinketh (Inspirational) James Allen
- Beating the Street (Stock Investments) Peter Lynch ***
- Chaos – Making a New Science (General) James Gleick
- Creating Wealth (Real Estate) Robert Allen ***
- E-Myth (Business) Michael Gerber ***
- Incorporate and Grow Rich (Incorporating) call publisher, Sage Int’l, at 1-800-254-5779, C. W. Allen
- Investment Biker (Investing) Jim Rogers
- Market Wizards (Stock Trading) Jack Schwager
- Over The Top (Success Strategies) Zig Ziglar ***
- The New Positioning (Marketing) Jack Trout
- The Wall Street Journal Guide to Understand Money & Investing (Stocks, Bonds, Mutual Funds, Futures, & Money) Kenneth M. Morris, Allan M. Seigel
- The Warren Buffett Way (Investment Strategies) Robert Hagstrom ***
- Trading For A Living (Stock Trading) Dr. Alexander Elder
- Unlimited Power (Successful Strategies) Anthony Robbins ***
- Unlimited Wealth (Wealth) Paul Zane Pilzer
- The Element (Self Analysis & Direction) Ken Robinson, Ph.D.
- Wealth Without Risk (Personal Finance) Charles Givens
- How To Sell Anything To Anyone (Sales) Joe Girraud
- Nothing Down (Real Estate) Robert Allen
- Asset Protection Secrets (Estate Planning, Asset Protection & Accounting) Arnold S. Goldstein, LL.M. Ph.D.
- Swim With The Sharks Without Being Eaten Alive, & Beware The Naked Man Who Offers His Shirt (Conceptual Skills, Entrepreneurship) Harvey MacKay
- The Law of Success (Secrets of Success) Napoleon Hill
- Winning on Wall Street (Stocks) Martin Zweig
- The 4-Hour Workweek (Business Strategy) Timothy Ferriss
For reference here are links to my prior posts on Financial Tips for soldiers:
- Part I
- Part II
- Part III
- Part IV
The information I have provided you in my last 5 articles is fairly succinct and extremely powerful. The recommended sources of reading I have provided is even more powerful. Now you have access to all of the information you need to become financially independent. If you effectively apply the information I have provided YOU WILL FIND FINANCIAL SUCCESS! I’m being honest and completely realistic when I say this to you. Combine your military retirement with 20 to 30 years of shred investing, and there’s no limit to what you could achieve! With this in mind, there’s no reason why you must continue living paycheck-to-paycheck. Take the time to read and expand your financial knowledge. Trust me when I say this is time well spent. Good luck in your future endeavors!