Military Finances: New Car or Financial Security

The following is a guest post from one of our readers. If you would like to write a guest post for compounding returns, please click here!

Very few career paths provide a greater opportunity to achieve long term financial success than military service. Doctors and lawyers might make a good deal more money, but early in their careers they are  burdened by student loan debt and have difficulty saving, while many other professionals have difficulty finding steady, gainful employment that pays well.

The military, however, has several financial advantages. Some examples include:

• Steady Pay Check
• Little Threat of Unemployment
• Tax-Free Shopping at Exchange and Commissary
• Tax- Free Housing Allowance (or Government Provided Housing)
• GI Bill (with Generous Housing Stipend)
• Tax Free Income on Deployment
• Affordable Medical Care
• Steady Pay at a Young Age

Military members have no doubt earned these benefits through their commitment to service and constant sacrifice, and used correctly, these benefits can help military members become well established financially for the future.

Given these circumstances, there is no excuse for military members not to start saving. 10% of a PFC’s salary is $183 per month (before BAH, BAS, Combat Pay etc). Save that much for the next 35 years, in a mutual fund that earns 8% per year (below historic average), and that comes out to $480,000.

One option for your savings is the Thrift Savings Plan. Another option for saving for your future is to consider a Roth IRA through Zecco or ING Direct. Both provide low cost savings vehicles that can help you save money in a tax sheltered account for retirement. For more information on Roth IRA accounts, visit our post explaining Roth IRA accounts. 

Another thing to consider is the effect of increasing your savings rate as you get promoted. Doing so can mean that the money you sock away for retirement is exponentially more. Visit Becoming a Millionaire on a Military Salary for more information.

Another consideration for many military members is the tax free combat pay with which these members return from deployment. Quite often, many of our younger Soldiers are arriving home with $25-30K saved. This is especially true for single soldiers. Often times Soldiers are tempted to buy the latest car like a brand new Mustang.

Go to a major military base after a unit redeploys, and go to the parking lot. You will see what I am talking about.

So, we can see that a military member has two options when receiving an influx of cash. Quite frequently this money is used to buy expensive consumer items like a new car or electronics. But what about the road less traveled?

Option #1: The Mustang- Besides the initial cost, one has to pay for maintenance, higher insurance, fuel, wear and tear (which is often in the military), parking, and other incidentals. It is likely that even with the deployment money, the car will prove to be a huge liability, taxing the Soldier’s already small salary.

Option #2: Investment- The member can put 30k into a low cost index fund. In 35 years, without adding a single penny, that money would grow to $443,000, assuming an 8% return (below historical averages). The interest on that (at 5%) would be about 1700 per month, which is roughly equal to a pension of a retiring Master Sergeant. So basically, that investment would substitute for a pension if the Soldier wanted to leave active duty immediately.

Few understand this calculus when making decisions on post deployment finances.

So bottom line, if you are having financial struggles, don’t blame the government, chain of command, President Obama, or the pay day lender outside the gate. The ability to achieve financial independence is in your hands, and you have advantages that few others have.

If you are looking for a great way to get started tracking your expenses and building long term wealth, consider using an online budgeting software to help you get started.

Photo By: Sanchom

Pay Off Debt or Invest for the Future?

Many people experience a great deal of angst when it comes to the question of whether you should pay off consumer debt or invest for your future needs with any extra cash on hand.

Conventional wisdom states that your money is best used by seeking out the best rate of return available. To that end, traditionally, no investment could even touch the returns most people can get from paying off their credit cards. With interest rates solidly in the double digits, paying off credit cards and other high interest debt is a no brainer.

But what about lower interest debt? Student loans, a car payment, or even a mortgage?

Should you keep making your regularly scheduled payments while squirreling away cash for the future, or attack your debt and eliminate all the payments you can before investing?

How to Best Use Your Capital (Traditional Wisdom):

Over the last 200 years, the stock market has returned around 10% per year including reinvested dividends.

Using this 10% average as a benchmark, many people choose to pay off any debt with an interest rate in excess of 10% while making the regular monthly payments on any accounts with an interest rate in the single digits, believing that their capital will be better used by investing for the future rather than paying down debt.

There is one major flaw in this logic.

The Problem with the Traditional Wisdom: 

In a predictable and orderly existence, this would be an excellent plan. But our society is neither predictable nor orderly, and the only certainty in life is change.

For example: If you lost your job today, how long could you survive with the same lifestyle? If you subscribe to the conventional wisdom, continuing to make payments on your debt while investing in the markets with your extra cash flow, the answer is likely to be "not long", even if you have an adequate emergency fund.

Now, if you lost your job and were free of all debt payments, how long could you survive on the same emergency fund? The answer is likely very different, because your expenses would be much lower. Free of debt repayment, most people could not only cut down on their financial stress, but also experience a huge increase in their lifestyle and savings rate.

Seeking Financial Freedom:

First on the list of anyone's financial priorities should be what we at compounding returns call financial freedom.

Financial freedom does not mean that you'll never have to pay another bill, or work another day in your life.

Financial freedom begins when you have stopped working for others, and begun to work for yourself in order to secure your own financial future.

When you are a debtor, you make others rich by offering them returns on their invested capital. When you are debt free, however, you can begin to make yourself rich. Put succinctly, if you owe money to anyone, you are helping them to grow their investments over time, while robbing yourself of the extra cash flow that you could be saving and investing to seek your own wealth over time.

Seek Financial Freedom by Eliminating Debt:

So, should you pay off debt or invest? At compounding returns, we believe that for most people, the answer is to pay off all consumer debt as soon as possible. This will not only free up cash flow and ensure returns, but will help most people sleep at night, knowing that you will be free to build your own wealth instead of that of the banks or financial institutions' shareholders.

3 Ways to Save Money on Credit Card Bills

The following is a guest post by one of our readers. If you are interested in guest posting on compounding returns, click here! Enjoy the post!

It's no secret. Banks are trying to get your money right and left. And credit cards have historically proven a great way for the financial institutions to get their hands on your hard earned cash. But, shunning the financial institutions completely is not a wise strategy, as having a credit or debit card has become almost a necessity in modern America.

Of course, the best way to use a credit card is to find a no fee rewards card (we recommend Discover), and pay it off monthly.

But for some people, using credit cards the right way may not be an option because of financial difficulties. If that's the case, you may want to consider visiting A Guide to Paying Off Your Credit Cards for advice on how to dig your way out of credit card debt.

If you find yourself in a tough spot, and aren't yet in a position to bravely eliminate your credit card dependence, there are some options available that can help lower your payments and get you on solid financial footing for your journey out of debt.

Here are three relatively easy ways to carry a short term balance, and save money on your credit card bills while you develop your debt elimination strategy.

Switch To a Credit Union

One of the easiest ways to save money on debt payments over the short term is to switch to a credit union, like thousands of Americans have already done. This is great because it shows banks that consumers have a choice of institutions. But for the consumer, it can also lower interest rates on credit cards since credit unions are non-profit and thus don't try to scrape every ounce of money they can get out of you.

In fact, especially in the wake of the recent financial meltdown, thousands of people have made the migration to credit union based banking, and often rate their new financial service providers very highly, so not only will switching to a credit union allow you to save money, since they are generally non profit, but they also well known for doing an excellent job of keeping the customer first.

Get a Credit Report

If you decide to get a credit report online, you will finally know where you stand in the eyes of the financial institutions.

Knowing your credit score is imperative to being an empowered individual within our current capitalist society. Your credit score is used for everything from qualifying for the best rates on debt instruments (credit cards, car loans, and mortgages), to screening applicants for potential employment opportunities. In fact, your credit score and credit report are the two most important pieces of information that can make or break your financial future.

Knowing your credit score is not only empowering, but can also give you leverage with the financial institutions. In many cases, with a good credit score you can negotiate the best rates on your outstanding credit card balances, and other debt. This can save you a bundle on your long term credit card payments, because if you have good credit (Above 740), the banks (or credit unions) know that you will be more likely to pay back your credit card than if you have a bad credit score (Below 600). In general, the better your credit, the more you can save on a credit card.

If you are looking for a great and easy way to get your credit report, consider Equifax. Another option to consider is getting your credit report and ID protection with TrustedID. Just make sure you know your credit score and credit history!

Know Which Cards to Pay Back First

Knowing which card or cards to repay first is no easy task, especially if you are managing a number of cards and carrying a balance every month. If this describes your situation, consider signing up with Mint to track your spending and organize your debt into a manageable and easy to track online format.

Mint will allow you to clearly see which card carries the highest balance and highest interest. Generally speaking, this will let you organize your debt from highest priority to lowest.

Obviously, the highest priority cards will be any that you are behind on paying at least the minimum balance. Beyond these cards, you'll want to focus on either the card with the highest balance (as advocated by Dave Ramsey in The Total Money Makeover) or the highest interest rate (which we at compounding returns believe to be the smartest method). Either way way you choose to prioritize your debt, Mint can help you organize your debt and expenses and make your financial life much more manageable.

Another thing to consider (if you can't make all of your payments this month) is that not repaying retail credit cards debt only hurts your credit score around a third as much as missing a payment on a regular, bank-issued credit union-issued cards.

So, if you are in danger of defaulting on your loans it is wise to pay the major cards first. If, however, you are just attempting to prioritize your debt, you should focus on the cards with the highest interest rates.

The Bottom Line: 

All of us are at some stage of our own, personal financial journey. For many, even many of the best personal finance bloggers, this journey seemingly begins with a crushing tale of debt. Read this author's tale in Building Wealth is a Journey, not a Destination. But if you find yourself in a difficult financial spot, juggling massive credit card debt, you can use the tips above to get through your current difficulties, and when you are ready, consider moving on to our First 3 Steps in Debt Recovery.