A recent four-year study revealed that 65% of our military families are under some amount of financial stress.
The good news? There may be a few military benefits you’re not taking advantage of yet.
We’ve put together a guide to help put your mind at ease.
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” – Warren Buffett
War isn’t predictable, but money is.
Servicemembers shouldn’t be worried about money. If you’re in the military, you should be able to focus on your job without fearing foreclosure or bankruptcy.
Sadly, this isn’t the case.
According to a four-year study, 65% of military families experience financial stress. Did you catch that? The majority of our military families are experiencing financial stress.
You can be in the minority. The military sets you up for success — you just have to know how to succeed. Whether you’re in the military or thinking about joining, let’s dive in and see how you can excel financially.
The Financial Benefits of Being in the Military
I’ve been on active duty for many years now and noticed a trend. Brave men and women are going into the military straight out of high school without a clue about how to handle money. They don’t even know where to start.
What happens when people don’t know what they’re doing? They either learn by years of trial and error or find a financial mentor to guide them in the right direction.
The former happens more than the latter — remember the 65% figure from above.
The military provides all kinds of benefits for serving. Let’s look at a few of these benefits:
- Free College – This is the big one. Some people join solely for this. You get the GI Bill, but you may not even need to use it for yourself: The Military Tuition Assistance Program can cover 100% of your tuition and most fees, depending on your branch. There is an annual limit on how much you can spend, but you have enough to get your degree in a few years.
- Free Resources – Most military installations provide a nice gym, which saves you several hundred dollars per year. You can learn everything you need to know about personal finance at the base library, which offers interlibrary loans, so your selection is practically endless.
- Free Legal Services – Your standard will and living will are both free to create — and required — at the legal office, or JAG. The office also provides free legal advice, contract reviewing, powers of attorney, legal-document prep and tax advice.
- Free and Discounted Tickets – Through Waves of Honor, you can get free tickets to SeaWorld amusement parks for yourself and up to three dependents, once per year. You can also check your installation travel office for free and discounted local events, and heavily discounted Walt Disney World and Disneyland tickets.
- Space-Available Travel – With Space-A Travel, you can hop on a military flight from some installations to others for free or extremely cheap. Space-A doesn’t end there. AFVClub.com offers $349-per-week Space-A vacations for military members. By the way, if Space-A doesn’t work out for your flight, check out MilitaryFares.com.
- Free Healthcare – One of the greatest benefits of all is the free health insurance Tricare provides for military families. This saves you thousands of dollars every year, and it’s full-service healthcare that rarely requires a copay for any of the health, vision or dental services provided.
But your benefits don’t end there.
How Military Pay Works Out in Your Favor
While new service members often don’t recognize this, the military pays you strategically. Most people get paid, get taxed and get the rest, but not you.
You’re taxed on your base pay. Your other allowances aren’t taxed, and you don’t have to claim them as income. That’s right, more money in your pocket, especially if you’re in a lower tax bracket.
These are some of the non-taxable allowances that may apply to you:
- Basic Allowance for Housing: This is to cover or offset your housing costs. The rates adjust as the prices change in your area. Figure out how much the BAH is in your area and undershoot it. That way, you can have all your housing covered. Note: This allowance is called OHA overseas.
- Basic Allowance for Subsistence: This covers your monthly grocery bill. While it’s intended to cover only the service member’s food, it can be enough to cover your entire family’s food if you’re smart about it. This simple worksheet can help you with that.
- Overseas Cost of Living Allowance: This covers the cost of living for more expensive places overseas, but it also includes Alaska and Hawaii. In other words, the military sends you to exotic locations and may pay you extra for it.
Of course, the military also pays for each of your moves and pays to ship your vehicle when you’re ordered overseas.
It’s not a bad gig.
Talk to your supervisor to find out what other expenses the military may reimburse you for, especially during a permanent change of station. It’s all about knowing the system and using military benefits to your advantage.
That’s what the military can do for your money. Let’s see what you can do for your money.
1. Stop Spending So Much Money
It’s easy to get a little money and think you’re rich, but that’s also why 65% of us are worried about money.
The financial decisions you make as an E-1 will affect your life as an E-7. A long-term mindset is crucial.
It’s common to see a new service member immediately buy a new car, clothes and everything they’ve always wanted when they were living with mom and dad.
Let’s look at a major problem area: vehicles.
Rob Aeschbach, a military financial planner, says, “My simple rule on cars is don’t borrow more than five times base pay. For an E-3 that would probably get you a used hatchback instead of a new Mustang/Camaro/F-150. Nearly every service member I’ve seen in financial straits had unaffordable car payments.”
Don’t be car poor. If you have to finance a car, that means you can’t afford it. You can still finance it, but know you don’t own it until it’s paid off.
If you decide to finance a car, take advantage of the benefits the military provides servicemembers. You can expect a lower interest rate, a lower down payment and often additional discounts — just for being in the military.
Frugal living can be lots of fun, and saving money isn’t hard. It’s simple, but not always easy. You have to learn to control your money so you can afford the things you really want later in life.
If you’re new to the military, there are several steps you can take to set yourself up for success.
2. Avoid Debt Entirely
According to a National Foundation for Credit Counseling study, 32% of enlisted personnel have used at least one non-bank borrowing method, including payday loans, pawn shops, tax refund advances or other non-traditional loans.
On top of that, six of 10 service members carry month-to-month credit card balances.
If you have no debt, congratulations, you’re in the minority. If you’re part of the majority, though, you need to pay it off immediately.
Debt kills your financial productivity. Earning 10% on an investment doesn’t matter much when you’re paying 14% interest on your credit card.
But how do you pay it off?
There are two primary methods to pay off your debt:
- Debt Snowball: This method works best for the emotional, free-spirited type. You’ll pay off your debt in order of total balance, starting with the smallest balance and ending with the largest. The small wins in the beginning will motivate you to keep going.
- Debt Avalanche: This method works best for the scientific, analytical type. You’ll pay off your debt in order of interest rate, starting with the highest rate and ending with the lowest. This method makes more sense mathematically, since you’ll save more money overall.
3. Save for a Rainy Day
The NFCC study mentioned above also found that 55% of military members do not feel financially prepared for an emergency.
Dave Ramsey recommends storing a $1,000 emergency fund, even before you start tackling your debt. After you pay off all your debt (except your mortgage), you should save three to six months of living expenses. You never know what’s going to happen.
It’s often wishful thinking in the military to save some portion of every promotion. Be the one to actually do it. Instead of increasing your standard of living with that new money, increase your savings. You won’t miss it, I promise.
Just spend as if you were making one pay grade less than you are, and save the rest.
You can also take advantage of deployments and temporary duty (TDY) to make some extra cash. For TDYs, eat cheap and save your per diem. For deployments, spend like you’re not getting tax-free pay and save the rest.
4. Get a Second Income
One popular option for a second income in the military is real estate.
You don’t have to buy a home at each duty location, but if you’re smart about it, you can buy homes along the way that turn into income-producing rental properties.
Rich, from Rich on Money, shares his experience with real estate investing in the military. He’s had a lot of success with it. I have a rental property, and so do many of the military members I’ve met over the years.
There are plenty of other ways to earn a second income along with your military pay:
That’s just a drop in the bucket: There’s a plethora of other ways to make money from home.
You can even run a side hustle at home or go out and apply for a second job.
Either way, a second income can help you reach your financial goals. Just remember, if you go out and get a second job, you may need to clear it with your First Sergeant or supervisor first.
5. Plan for Retirement Now
You can retire a military millionaire, and it’s not that hard.
If you are enlisted for 20 years and retire from the military, you’ll have a nice passive income coming in for the rest of your life. If you calculate how much money you would need to save to earn that type of income off your nest egg, you will really appreciate the pension the military offers.
You may need more than just your pension in retirement, and sometimes outside forces push you out of the military before you can retire. Let’s talk about your investing options for retirement.
The Thrift Savings Plan is your primary retirement funnel because the fees are crazy low at around 0.03% for all funds. For the vast majority of military members, especially younger ones, the Roth TSP could make the most sense. You put after-tax dollars into it and don’t pay taxes on the capital gains when you pull the money out in retirement.
If you choose a Roth TSP over the traditional TSP and are diligent with investing in it, you’ll have hundreds of thousands of dollars in capital gains you won’t pay taxes on.
Outside of that, you can start a Roth IRA, but the contribution limits are just $5,500 as of 2018, while the contribution limit for your TSP is $18,500. That being said, you do have more investment options in an IRA, but your TSP is easy to automate and full of great options.
The goal is to max out your Roth TSP each year. Once you’ve got that, max out your Roth IRA. You can reverse the order if you prefer, but shoot for maxing out what you can.
Military Money Manual created a chart that shows you the exact percentage you need to contribute based on your pay grade:
Your TSP and IRA are your tax-advantaged options for retirement. You can’t touch the money until you’re 59 ½ — with a few exceptions — but you get all the tax benefits once you reach that age.
How the Thrift Savings Plan Works and Your Options
The TSP contains six basic options, and they’re all index funds.
Index funds are passive funds that invest in an entire index, like S&P 500, NASDAQ and Dow Jones Average. Passive investing means much lower fees since there isn’t a person selecting the stocks. Index funds are electronically invested based on the companies in that index.
Investing in index funds can be considered “investing in the market” itself.
Why would you want to do that?
Because, according to The Balance, “84% of actively-managed U.S. large blend funds underperformed their index, and 68% of actively-managed U.S. small value funds underperformed, as well.”
Here are the different index funds in the TSP:
- G Fund – This fund consists of government securities. You won’t lose money, but you won’t earn much either.
- F Fund – This fund consists of government-, corporate- and mortgage-backed bonds. It’s a bond index fund. There is moderate risk and performance.
- C Fund – This fund matches the S&P 500’s performance. There is moderate risk, but you’re investing in huge companies like Apple, General Electric and Walmart. You could often see high returns here, but you could also see big losses during downtimes in the market.
- S Fund – This fund matches the performance of the Dow Jones U.S. Completion TSM Index. Similar to the C Fund, this fund is invested in mega-corporations. You could see high returns at times and also high losses.
- I Fund – This fund matches the international index’s performance. Like all stock markets, there is risk, but the point of this index is to diversify outside of the U.S. with a percentage of your money.
- L Funds – These are lifecycle funds diversified across the other funds in the TSP. Lifecycle funds take your target retirement year into account and invest accordingly. If you’re far from retirement, your money is automatically invested in higher-risk funds. The investing becomes more conservative as you near retirement.
Your money automatically goes into the G Fund, so if you want to switch funds, get your account information and change the fund allocation on the Thrift Savings Plan website, TSP.gov.
The military pays well, and if you do it right, you can retire a military millionaire.
That being said, most people do it wrong. I’ve seen it. You need to be the 1% of the 1% that does it right. You have the information to make it work — it’s up to you to take action.
Kalen Bruce, founder of MoneyMiniBlog.com, simplifies complex financial topics and teaches action-oriented productivity. You can ask him military finance questions at MoneyMiniBlog and get some free finance books here.
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