Financial Advice For a New 2nd Lt / Ensign

Discussion in 'Life After the Academy' started by Bullet, Dec 4, 2011.

  1. Bullet

    Bullet Member

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    It's that time of year, where parents such as us are racking our brains trying to think of the best Holiday gifts for our sons and daughters either getting ready to go to college, or (as in my DS's case) preparing for life beyond college. Well, in my DS's case, he asked me a favor a few weeks back: he wants to sit down with me sometime over the Holiday break and talk about what he should be doing financially once he commissions in May and starts his own military career.

    And then it hit me. What better Holiday gift is there than KNOWLEDGE and EXPERIENCE? Particularly in a topic that (unfortunately) most young adults have very little solid background in (if not very poor financial habits) and will be perhaps one of their greatest and most important challenges for their ENTIRE lives, with the greatest consequences.

    But I'm also not naive. Most, if not all, of the parents and "experienced adults" (nice way of saying "old heads" :biggrin:) on here are pretty smart and pretty involved in their kids lives and future already (or you wouldn't be on here). And they've probably had this conversation, full of advice, general rules of thumb, and wisdom, with their children already. But this is for those few --the lurkers, those who may not have that strong financial background, the kids just starting out, etc. -- who may benefit from some sound advice.

    I'm going to propose we do this in two lists; the "Rules to Financially Live and Succeed By”, and the "What You Should Be Doing Now". I'll start it off, feel to copy the list each time when you add to it, and add explanations and examples when you add something new. If we feel something needs to be higher in priority, we'll adjust the list as required.

    Financial Advice For A New 2nd Lt / Ensign

    Rules to Financially Live and Succeed By

    1) Educate Yourself!
    -- Your finances are one of the most important long term keys to your success in life. Being happy in what you are doing and who you are are just as important, but being financially secure throughout your life only makes your situation better. NO ONE should care more about it than you, so take the time to get smart on it. Read a book (or 10), subscribe to one of the dozens of financially focused magazines that are out there. Spend more time on the internet researching financial issues than watching a cat playing the organ on Youtube. NEVER, EVER, NEVER make a financial decision without doing your homework first!

    2) Have short-term, mid-term, and long term financial goals
    -- Short term goals: buying that first car, getting started building up an emergency fund (I'll explain that later), moving out of college life and into your own independent life (no longer living off of Mommy's and Daddy's wallet) getting yourself that cool new toy / iPhone (or computer, or TV, or whatever). Parents, feel free to add.
    -- Mid term goals: Getting married, buying a house or renting an apartment, building a family and making sure they would be OK if you are gone (deployed, remote, PASSED AWAY, etc), etc.
    -- Finishing your military career and moving on to a new one, kid’s college, retirement, etc.

    3) Make a budget, and stick to it!
    -- The first part is easy if you take the time to really do it. It should be focused on allowing you to realistically meet the goals you planned above, balanced against reality and desires. Updating said budget at regular intervals and at every life milestone (like getting married, buying a house, or having a new child) takes more effort as well. The second part (sticking to it) is the hardest, and the main cause for financial failure. We can add some pointers to the second list to help you out as you start your budget.

    4) Live Within Your Means (or better yet, below it)
    -- Perhaps the biggest failure of the American life-style and culture over the past two generations: trying to keep up with, and beat, the Jones’. A culture of consumption and instant gratification, only to need even more because you feel what you have now is not good enough for you (even after you were just crying for it a few months ago). And THAT biggest failure has led more people to financial difficulties than anything else out there combined. Don’t be THAT guy / gal. Before you buy anything expensive (and to me, anything over $100 is expensive. To a Lt, it should be anything over $50), ask your self, “Do I really NEED this or do I just WANT this?” and “Can I wait until I can save up to AFFORD this before I buy it?”
    Setting short term goals and putting them in your budget should help you accomplish this rule.

    5) Save at least 15% - 20% of your salary
    -- You’ll soon be making a steady pay check. Part of that needs to go to your short-, mid, and long-term goals. Things like emergency funds, investments, college funds, retirement planning, etc. EVERY TIME you get a raise, take 15% - 20% of it and ADD it to your savings plan.

    5) Pay Yourself first.
    -- That 15 – 20% I mention above? The military has a GREAT service for your pay called AUTOMATIC DEDUCTIONS. Very easy to set up (right on the MyPay web-site the military pay folk have set up for you). Sign up right away to have that 15% - 20% of you pay automatically go to your investments. Too many folk say to themselves “I’ll simply write a check for those things at the end of the month”, then find themselves NOT doing it as life throws them curveballs, or that extra money in their pocket keeps screaming at them “Spend Me!”. Pay your self first with an automatic deduction, and you’ll never see it to worry about spending it. You’ll “Live Within Your Means” on your take home pay AFTER these deductions have already been made.

    6) Have an “Emergency” Fund
    -- Start saving now to put at least 6 months salary into a separate fund (savings account, for example) where you can easily get to the money when NEEDED (not WANTED!). This takes discipline and time, and should be your first mid-term goal. You’ll need this money when life throws you those curve-balls I mentioned (fix a car, replace an appliance, etc.)

    7) Be Smart about Credit
    -- Credit is both a good thing and a bad thing. Everyone has heard how credit can be bad, but it is also needed to make BIG financial decisions in life. I don’t know too many military people who can pay for a new car, or a house, in CASH. So, work on keeping a good credit rating. Have a credit card or two, and not many more. Understand interest rates and how it effects what you are ULTIMATELY paying when you buy something on credit. PAY YOUR CREDIT ACCOUNTS ON TIME! Try to owe less than 30% of a card’s credit limit on any one card at any time. Better yet, pay it off each month youowe something on it. USE CREDIT to build your rating, but use it WISELY.

    8) Pay in Cash
    -- Save for those things you WANT, like that new iPhone, or new TV, or vacation. When you get them, you’ll feel rewarded as well as satisfied you now have it. Make saving for those big short-term items a part of your budget. In fact, if you plan to take 6 months to save enough to buy something, buy it at the 5th month with the 6th month’s payment on your credit card, and pay that last payment off the next month (it builds your credit history without going into credit debt).

    Ok, everyone: your turn to add to THIS list.
     
    Last edited: Dec 4, 2011
  2. Bullet

    Bullet Member

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    Next list:

    What You Should Do Now

    1) Car payments should be less then 10% of your monthly budget.
    -- If you can’t afford to get less than that, either save up for a bigger downpayment, or you shouldn’t buy that expensive a car in the first place.

    2) Maximize your Roth IRA
    -- The military offers the Thrift Savings Plan, which is nice, but it doesn’t offer matching contributions (free money). Maximize your Roth IRA first, since the taxes are taken out in the beginning and not at the end when you withdraw from it. When you get to a company that offers matching contributions on something like a 401k, THEN you can put that as your higher priority. Build your investment / retirement portfolio NOW and let interest over 40 years work for you.

    3) Mortgage payments should be less than 30% of your monthly budget.
    -- Same words as above for car payments. More than 30%, re-think your plan to buy the home…

    4) Have Insurance that Meets Your Needs
    -- SGLI is fantastic, and one of the cheapest policies out there. For you young-uns, the max ($400K) is fine. As you get older and start adding responsibilities such as a spouse, children, mortgage, etc., you may want to consider buying more. Another reason NOT to smoke, policies are cheaper! Buy term insurance and adjust throughout your life as your situations change and investments build. The goal is to have XXX amount of dollars in case of your death, later in life your investments should help cover that. And don’t forget about Social Security Benefits for your survivors, which will help reduce what you need plan for insurance wise.
    A word of warning: there are a LOT of companies that will offer financial planning and insurance services to military members because they know they have a steady income and are reliable. Some are honest brokers, some are not. I tend to advise avoiding the ones who are selling you an insurance product for a long term versus those who are selling you there immediate service to build you a financial plan. But, if you follow my first rule, you shouldn’t really need their services. You MAY need a tax advisor later in life as you manage your investments.
     
  3. SamAca10

    SamAca10 Ensign - DWO

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  4. flieger83

    flieger83 Super Moderator Moderator

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    And he is DEAD ON BA**S ACCURATE! :thumb:

    True story...a friend of mine in SoCal.

    Comes in as a brand new "Butter Bar" 2Lt. Gets this advice from his first flight leader. And, knowing he wasn't a financial type, WRITES IT DOWN and follows it.

    Over the next 27 1/2 years, he does this religiously...he also buys a house. When he PCS'd, he kept it, found a GOOD company to rent it for him, and moved on. Over his career he purchased several homes and kept them, renting, etc. And he kept maximizing his "pay yourself first!"

    When he was a crusty O-6 (Colonel for those of you that don't know the jargon) he decided he wasn't going to make Brigadier General and decided to retire. He did.

    Then...gee...what to do? So he got a small job, paying a whopping $32K a year and was happy. His financial advisor told him: sell the houses you have and keep the one you want to retire with. He did so, and put the modest profits (I remember he said he lost money on one) in with that which he had saved/invested since he was a 2Lt.

    I replaced him at a job in SoCal in 2002...he had been retired 3 years. He was 54 years young. He was "retiring for good" because his financial guy said: "Gary...I was doing the numbers today...you now have $3.9 MILLION dollars set aside from your AF saving, homes, etc..." You are at your "goal!"

    So Gary quit his job, and he and his wife have spent the last 9 years...traveling around the country, Canada, Alaska, and other parts in their "Airstream" trailer. And also flying/cruising other lovely locales.

    I remember all the numbers because he was VERY honest: "If it hadn't been for my flight lead..."

    Steve
    USAFA ALO
    USAFA '83
     
  5. patentesq

    patentesq Parent

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    Bullet, excellent list! My contribution is this:

    5) Don't be in a rush to get married.
     
  6. SamAca10

    SamAca10 Ensign - DWO

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    maybe I should print out a hard copy of this stuff and save it...
     
  7. MemberLG

    MemberLG Member

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    Only thing I will add is be very careful if you are going to use any finanical planning service, especailly ones claiming that specailize working with the military members.

    I did and I regret my decision to do so. I intentionaly decided to not to mention the company's name as other miltiary members might had different experience than I did.
     
  8. Pima

    Pima Parent

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    I am pretty positive the company you are inferring went from a 4 letter acronym to a 2 word name.

    I agree with you, but I also disagree.

    The fund they put us in was a Fidelity Fund, triple split 1X. double split 3 X, and every yr we have cap and divs.

    They also have some crappy advisors. I recall 1 who at our yrly review asked us to hand over our credit cards, even though we were at 25-30% of the limit. He had this huge glass jar of cut up cards. He stated by cutting them up and investing more we would be better off. Either buy more mutuals or higher life insurance

    Yes, he had a pt. However, we had 3 children under the age of 6 and back on those days ATM cards were not like today...i.e. VISA. Only could be used at your bank.

    We didn't cut our cards, and I never attended an annual meeting again. I got that unless I purchased something I was dead wood to him because he would not make a penny off of us.

    I am not someone who would state don't use a financial advisor. If you don't understand the market you will hurt yourself. There is a book called Rich Dad, Poor Dad. This issue is addressed.

    You need to understand the market, and unless you are an Econ or Bus. major it is highly unlikely you will understand the finesse of how T-Bills, Gold and the Euro market will impact your investment.

    Leave that to the experts.
     
  9. AikiBudo

    AikiBudo Member

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    Excellent advice by Bullet. You've hit all the basics. The 15-20% savings goal (half going to retirement and half to shorter term goals) from day one is a critical piece that many people put off for far to long or never get to - there is always some excuse or some important "need" that seems to constantly suck up that spare cash. You've got to live within your means - use savings for the real emergencies - that's what it is there for. I would add that a simple rule of thumb for retirement savings is 20X. Using the 4-5% withdraw rule target a retirement investment portfolio of approximately 20 times your retirement income need. For example if your income needed in retirement is $100k and your pension and social security covers $50k - your shortfall is $50k. Preferably you would want to have $1M to be able to withdraw $50k per year with a pretty good chance of not running out of money. Also regarding investment advice there is plenty of adequate free advice and resources to take advantage of and most employer sponsored defined contribution plans (such as 401Ks) provide decent help with selecting an appropriate asset allocation plan. If you need additional help look for an investment professional who works for you in a fiduciary advisory capacity such as a Registered Investment Advisor (RIA) and holds minimum certifications such as a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) or Certified Investment Management Analyst (CIMA) - get client references and check licenses and background on the FINRA website.
     
  10. hornetguy

    hornetguy USAFA Cadet

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    Bullet,

    Excellent post (as usual). I follow nearly everything in there myself and at 1.5 years out of the Academy I am in financially excellent shape. Suzy Orman would be fawning over my finances based on my age and her "rules" for savings. If the AF booted me, I would be safe for a couple years!

    I want to emphasize a few parts based on my peers and myself.

    The automatic deductions are one of the best things about modern financial planning. I have set auto deductions for my Roth ($416 a month!), my cadet loan, my modest car payment, insurance, and rent. Right after my paychecks come in twice a month, my auto payments kick in immediately so that by the time I see my account, the deductions are gone and what is left is my "discretionary" funds. I never see the pre-bill, pre-retirement, pre-pay-myself amount. For me, this isn't a huge deal as I'm a penny pincher. I have a best friend who CANNOT resist (I am not kidding) wiping her account every paycheck on something new to do or buy. She knows it. As a result, she has implemented auto deductions to pay off her loans early, ensure credit cards are paid off right away, etc. As a result, while her spending habits are atrocious, she has made sure to put money in retirement and to pay off bills and finish paying her loans early. From one end of the spectrum to another, the auto-pay feature is a life saver.

    USAA has a fantastic interface. You can link all your non-USAA accounts to it. I have my scottrade and AMEX account linked. It update the status of those accounts so I can see ALL my accounts and finances on one page in USAA. This is GLORIOUS to have as I can assess my entire financial health in one minute on that page.

    Credit Cards. Keep only one! Two works when that card may not be accepted: I have an AMEX with a wonderful points program that I use for everything. Some places do not take AMEX so I have a USAA Mastercard for those few occasions.

    Party-Hardy LT time. We are young JOs, so most of us will enjoy going to the bars with friends. When you're using a card on a tab, man can you rack it up without thinking. Also can be sitting there waiting forever to have the card rung up. To control myself and avoid the lines, I budget my drinking allowance for the night, put that amount of cash in my wallet, and when it's gone....it's gone. And I have saved many headaches waiting for the overworked bartender to ring up the card. They appreciate it as well.
     
  11. 2012mom?

    2012mom? Member

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    Credit cards: I'd suggest having two. You should be able to get ones that do not charge an annual fee.

    Card 1: Make sure this one has the lowest possible interest rate. Make sure to use it for any purchase that you absolutely cannot pay off within one month.

    The following is my mod to Bullet's #8 in the first list:
    Card 2: Make sure this card has the best "cash back" plan you can find. Use it for everything else you purchase - but make sure that you pay it off in full every month. This allows you to have a detailed record of everything you've bought that month, even that cup of fancy coffee, or that ebook, in addition to getting cash back on most of your spending. So long as you're careful to always pay in full and never pay late, it's even better than paying cash.
     
  12. raimius

    raimius USAFA Alumnus

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    1. A single SA grad should NEVER be paying debt on credit cards. We make plenty of money to stay out of CC debt!

    2. Paying for everything with plastic carries the risk of "little" expenses adding up much quicker than one might think!
     
  13. 2012mom?

    2012mom? Member

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    Agreed in principle. However, if you're buying major appliances or furniture, even a new O-1 salary may require temporary help.

    That's a big reason TO put absolutely every purchase onto a cash back card. Once the bill comes in, you see just how much you frittered away. Trust me, seeing in black and white the list of every $5 purchase, followed by the total monthly cost, can help you to actively decide whether the next "little" expense is really necessary. You have to have the discipline to only buy things for which you could pay cash.
     
  14. Chockstock

    Chockstock "Forever One Team"

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    Bullet, thank you very much, I appreciate it greatly and I am sure that everyone else that this relates to does as well.
     
  15. 50stars

    50stars Member

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    Very nicely done, thank you bullet and to all added more good tips. Everyone should see this, I see a good financial future on taking this advice.
     
  16. Capt MJ

    Capt MJ Member

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    DO NOT PROCRASTINATE.

    JUST DO IT, when it comes to saving for the long-term, for the 30-40 years you need money to live on after you stop working for a salary. There are abundant examples in financial management presentations about the huge difference in starting IRA, TSP, 401K, mutual funds, etc., in early 20's vs. 30's. Don't do the "I'll wait until after this sea duty when I have the time to figure it out," or "when I get married, he/she will take care of this stuff I don't understand." It takes A LOT (sorry about all the caps, I owe a huge debt of gratitude to a senior officer who pounded the podium back when I was an ensign about starting early to plan for retirement) of money to live at the same standard of living.

    Figure out the difference between Wants and Needs, and prioritize your budget accordingly. You need to drink water. You want to have a Starbucks or a beer. You need to have reliable transportation. You want to drive a (fill in blank with your personal dream car). You need decent shoes. You want (fill in blank with elite brand for either men or women). Controlling where the money goes on the little stuff will mean the difference over the long haul as to how comfortable and worry-free you are in those - yep, 30-40 years where you are living off the wealth you amassed. You have to build that pile even when YOUR kids are begging for the iPad 2000, car, college, etc., and you have current bills to pay, including that pesky mortage.

    I believed that senior captain and did what he suggested back in my early 20's, and I jumped in the shallow end of the pool with an IRA. I got smarter, I put more to work in different areas as other posters have indicated, and I have gotten to where I need to be. My husband and I are equally dedicated and responsible about our joint finances, and it has paid off.

    My husband and I use Quicken for the home budget and investment tracking, which uplinks to our various investment accounts. We still have a monthly budget for routine expenditures. I go to the Commissary with list and coupons; I buy generic Advil. Lifetime habits of financial discipline pay off in the long run and allow you to enjoy those "wants," because the current, mid-term and future "needs" are well taken care of.


    Finally, a resource available to everyone, and one that I used as a junior officer and still do today: the USAA Educational Foundation publications. This is a non-profit educational organization totally separate from the dot-com USAA. All of the Educational Foundation's publications are based on solid financial concepts, no advertising for any products, as required of a 501(c)3 organization. Great topics - handling credit, buying a car, buying a house, retirement planning in 20's and 30's, beginning investing, and many others. They can be viewed in pdf, downloaded or ordered in quantity - all free.

    https://www.usaaedfoundation.org/

    Full disclosure: as noted in my Profile, I am an employee of USAA.
     
  17. nick4060

    nick4060 Member

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    All great advice. But I have a question. Does anyone have ideas for a temporary job between commissioning and initial assignments?

    I'm commissioning in May, but I wont EAD and report to Goodfellow for tech school for most likely 6-12 months. That leaves me with no responsibilities and NO INCOME for quite a while.


    Id like to get a temporary job working for a company in the defense industry. I'll have a college degree and a TS/SCI clearance. But that is ALL I'LL HAVE. No actual experience. Do any of the parents/ex-military folks on here work for defense contractors and know if there are low-level positions in the industry for people in my position?

    If not, I guess I'll be working as a bartender for a while.
     
  18. Bullet

    Bullet Member

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    Nick, I was in the same boat as you waaaay back when I commissioned. Waited almost 10 months from the time I pinned on to the time I reported for Undergrad Nav Training.

    As to whether Defense Contractor companies looking to hire a temp. First and foremost, are you NEAR any while your waiting? The place where they are highest in density is of course DC. Some other places in California, Texas, and Florida have quite a few as well.

    The issue becomes: do I hire a kid who will only be with me for a few months for that low-level job, I do I hire someone who might stay longer? Having your clearances may help, but for the types of work your looking to do, not that much (it still takes them months to get your paperwork straightened out even WITH the clearances. By the time that is all done, they'd only have you for a very short while. = Not worth their time.)

    When I was in your boat, I was asked by a professor to work with him at NASA. Meant I would have had to stay away from home while I waited. And funny you should mention it, but I worked instead as a bartender, living at home with my parents, working 60 - 80 hours a week because I was one of the few at my restaurant who wasn't also a student and could only work 2 - 4 shifts a week. Had a BLAST! Made a boat-load of cash for a young guy, just doing nothing but waiting my time, hanging out with my future wife and working the bar. Actually, I made more money and had waaaaay more fun than having some low-level clerk position in a company. You'll bring someone coffee in either job, but as a bartender you get tipped for that service.

    Of course, in these economic times, things may be different.

    BL: do what YOU want to do. But in my opinion, you'll be spending the next bunch of years hard at work. Your young. Enjoy the off time while you can, in a job that has little responsibility but better pay.

    Besides, you'll meet TONS more women as a bartender! :biggrin:
    But I wouldn't know; I was already engaged at the time! (he says, knowing that Pima will eventually read this :eek: :redface:)
     
  19. nick4060

    nick4060 Member

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    I definitely wouldn't complain about tending bar for a while. But it just feels like Im supposed to get a non-college type job when I'm out of college. I guess there wont be much of a choice, as you said, who's going to hire someone that will have to quit after 6-12 months
     
  20. Bullet

    Bullet Member

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    Having a job, ANY job, that allows you to live like a responsible adult and pay your way versus relying on your parents is what you should worry about. Not the type of job. If you feel uncomfortable with your level of adulthood because you are a college grad still living under your parent's roof, pay them rent (which is what I did).

    Besides, you DO have a very adult career waiting for you. Something a LOT of your fellow grads this year do not have...

    But I wouldn't give up on that "I need to do something more adult for these 10 months" feeling if they are important to you. Buy a Washington Times, look at the help wanted section for all the tech companies and defense contractors and apply. Of you need advice on what to tell them, PM me. What would it hurt?

    Best of luck to you!
     

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