Finance and Investing for Active Duty Military Members

Military life comes with its own peculiar set of risks and challenges. One of the biggest challenges that military members face is learning to take advantage of the financial benefits that they are offered by their chosen profession. As military members have chosen a different path than most of their friends and colleagues, many haven't been adequately advised as to the personal financial factors that come with a career in the military.

Below are just a few of the things that military members should be aware of and act upon to ensure a comfortable lifestyle while serving at home and abroad.

Tax Advantages for Military Members:

One significant factor for military financial planning is that the military offers much of their compensation tax free in the form of allowances for housing and subsistence. In addition, many states do not tax military pay; and when you are deployed to a combat zone, you pay no federal taxes on your earnings whatsoever.

Understanding these tax advantages and taking advantage of every benefit that Uncle Sam has offered you in return for your service is step number one in getting the most financial return out of your military career.

Education, Insurance, and Retirement Benefits: 

The financial advantages offered to military members do not end with tax advantaged earnings. Military members have access to low cost life insurance, healthcare provided free of charge (for active duty), a robust tuition assistance and advanced education program (in the form of Tuition Assistance and the Post-9/11 GI Bill), and active duty retirement eligibility after 20 years of active duty service, which means that a military member could potentially retire at age 38 with a pension worth 50% of their average highest 3 years of base pay.

The Military Debt Problem: 

Despite some of the advantages above, many military members are in tough financial straights. See Personal Finance for Military Members for the results of a recent FINRA Survey that explored some of the ways in which military members have struggled financially. The study indicated that many military members are trapped under the weight of consumer debt.

I can relate. As a 22 year old, single officer in the military, I found myself $62,000 in debt. Much of this was due to student loan debt, and the rest was split between credit card debt and a automotive loan.

Budgeting for Military Members:

It wasn't until I started using Mint.com- free personal finance software, that I started to see where my money was going. Using Mint to Build My Budget was one of the best things I have done for my personal finances. It streamlined the budgeting process and made it easy to track my expenses. It was the first step in my journey to spending less than I make and paying off debt.

Fixing the Military Debt Problem:

If you are like I was, an active duty military member with a debt problem, read A Guide to Paying Off Credit Card Debt. Paying off your debt should be your first step in building an investment portfolio. Nowhere else in the world will you find the opportunity for guaranteed 20% per year returns. But paying off your credit card debt will absolutely yield 20% returns or more depending on your card balances and terms of your loans.

Investing for Military Members:

Fact is, if you aspire to turn your military paycheck into a robust investment portfolio, you have to use the Power of Compound Interest to your advantage. This means paying off your credit card and other high interest debt, while investing for the future. For military members, the best forms of investment vehicles available for retirement are the Thrift Savings Plan and Roth IRA.

Contributing as much as possible to these accounts early in your military career can make you a military millionaire by the age of 59 1/2, when you can withdraw the earnings from these tax deferred accounts without penalty. (This assumes average stock market returns of approximately 10% as indicated by research in Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies, by Jeremy Siegel).

If these types of accounts seem mysterious to you, as they did to me just a scant 3 years ago, visit the following posts about Understanding the Thrift Savings Plan, and learning more about Roth IRAs. Amazingly, by harnessing the power of compounding returns and defferred gratification, you can learn how to become a Millionaire On A Military Salary.

Advanced Education for Military Members:

Getting promoted in the military will greatly help increase your earning power. One key way to be competitive for promotions within the military system is to further your education.

Whether in 4 years or 40, however, your military career will eventually end, so when considering getting an advanced degree, you may want to consider hedging your bets by studying the Top 10 Highest Paying Jobs to see what might be the best major or degree field.

Online education may also be a great option for you if you are a military member on deployment. If you are wary of online education, check out 10 Affordable and Respected Online Colleges where you can get an affordable degree that will get your foot in the door at a new job whether your military career ends with your first enlistment or after 20 or 30 years.

The Military Retirement System:

With the 20 year retirement carrot dangling before you as a military member, if you are looking to call it quits for good at the ripe old age of 38, you will definitely need to consider a taxable brokerage account, since you will not be able to tap your retirement accounts without penalty until age 59 1/2.

ING DIRECT USA - High Yield Savings with the Orange Savings Account may be a good place to start a taxable brokerage account, as ING Direct now offers a program called ShareBuilder that can help you build a portfolio little by little with options such as scheduled monthly or weekly transfers into your investment account. This strategy will let you dollar cost average into investments, purchasing shares in both rising and falling markets. Probably the best part about ShareBuilder is that it allows you to purchase partial shares or stock and to participate in dividend reinvestment.

For your taxable brokerage account, you should probably lean heavily towards Dividend Growth Stocks for the Long Term as they offer both long term capital appreciation, and a nice supplemental source of dividend income for your early retirement dreams. For more information on dividend growth investing, consider buying the book The Single Best Investment: Creating Wealth with Dividend Growth.

Planning Your Next Career:

If you are like many military members, however, you will not be ready to fully retire at 40, or you may not stick around long enough for retirement eligibility. In that case, the military offers some great tuition assistance programs and the Post 9/11 GI Bill that can help you get an education which can greatly increase your earning power as proved by Bureau of Labor and Statistics research as indicated in Education: The Key to a Rich Future.

Real Estate Investing for Military Members:

One big question that comes up in military life is the old question of whether you should Buy or Rent a home. For most military member, it probably makes a lot of sense to rent, especially in the wake of the real estate downturn, although if you can find a distressed home or property and Don't pay full price for your home. Visit RealtyTrac for homes at half price. It may make sense to buy a home at your next duty station, since worst case scenario, you could at least rent the home as a nice source of passive income (provided you purchase a home near a military installation and in a good neighborhood and can find a military renter).

Military Financial Considerations:

This list is not all inclusive. Are you a military member? What other considerations would you like to see discussed in reference to military investing and financial planning?