for military personnel personal finance basics 1 ltcol. m. hensen, 3d mlg

FOR MILITARY PERSONNEL

Personal Finance Basics1

LtCol. M. Hensen, 3d MLG

Disclaimers

No such thing as one-size fits all solutions

Take the time to educate yourself further Knowledge truly is power in finances

Simple ideas/solutions – but not always actually easy to do

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Is this You…..Or will it become You?

61% of Americans live paycheck to paycheck More than 1 in 5 of these earn $100k+ annually

57% of households don’t have a budget

You spend 12-18% more when you swipe your card than when you use cash

64% of consumers age 18-24 do not know what interest rate they’re paying on their credit cards

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Is this You…..Or will it become You?

Average credit card debt per household was $8,329 at the end of 2008

56% of people have no idea their credit score is the most important factor for applying for mortgage, car loan & new credit cards

Adults in the US with net worth of $1M+: 1.2% High-schoolers who expect to become millionaires by age

40: 39%

23% of Americans have nothing at all saved for long-term goals such as retirement

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Outline

Assessment – Where am I now?Goal setting – Where do I want to go?Planning – How do I get there?Execute Monitor & Reassess – Check your progressSummaryResources (some)

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Assets - Liabilities = Net Worth

Liabilities – What you owe

Examples Credit card balances Car loans Student loans Home loans

Assessment – Where am I now?Personal Balance Sheet

Assets – What you own

Examples Savings Accts. Mutual Funds Home, Car Personal Property

Net Worth should grow annually – check it once a year!

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Personal Income Statement

Income Vs. Ex.

Salary Bank interest,

dividends Capital gains Etc.

Expenses Ex.

Taxes Rent Car Savings Etc.

Assessment

Track all your spending for a month to really know/confirm!

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Goal Setting – Where do I want to go?CRITICAL!

Long-term (>10 yrs.): Ex. – Retirement savings, Kids college fund

Medium-term (3-7 yrs.): Ex. – Save for car, house down payment

Short-term (1-3 yrs.): Ex. – Save an emergency fund, pay off credit card balance

Goals should be written down & “SMART” Specific, Measurable, Attainable, Relevant, & Time-based

Ex. Take vacation to Disneyworld in summer 2013 by saving $250 per month for 16 months

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Planning – How do I get there?

Budget (spending plan)OrganizeDebt & CreditAdequate protection (insurance)Tax planningSaving & Investment planningRetirement planningEstate (death) planning

Blueprint for financial security and independence!

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Budget

Develop a monthly spending plan based on your goals List of income & expenses (planned vs. actual) –

Accurate data Tools – Pencil & paper, spreadsheet, software,

websites, envelopes, etc.

Prioritize goals & expenses – Distinguish needs vs. wants

Based on your priorities – what you value

Give yourself some fun money

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Budget

Live well below your means – maintain standard of living 1 rank below your pay grade!

Budget for discretionary daily expenses like books, magazines, entertainment, impulse purchases, snacks, eating out

Include quarterly/annual expenses like insurance & property taxes (monthly set-aside)

Budget for the unexpected – vehicle & home repairs/maintenance

Before making any large $/significant spur of the moment purchases Sleep on it first Consult your spouse or a family member

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Budget

Forget keeping up with the Joneses!

Shop with cheapskates (or better yet alone) Avoid impulse buys, “negative” influence/peer pressure

Keep track – know where your money goes

Automate saving, investing, bill-paying (on-line banking) Easier to budget, no late fees, safe, cheap, convenient, helps

track spending

Focus on the big-ticket items – House, car, credit, food & health care (once out of the military)

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Budget

Car Always buy a used car (2-3 yrs. old - new car depreciates

approx. 45% in 1st 3 yrs)

Make 25% down-payment minimum, more better, all cash best

Limit loan term to 3 yrs (save big on interest costs)

Keep monthly payment less than 8% gross income

Have reputable mechanic inspect before you buy

Keep your car longer: 7-10 yrs.+

Avoid “frivolous” options & dealer “extras”

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Budget

House Get smallest, cheapest house in good neighborhood in

good school district

Keep monthly payment less than 20% gross income

Make 20% down-payment (see notes)

Get 15 yr. loan if you can afford (save big $ on interest costs)

Resist temptation to trade up to more expensive home

Don’t forget VA home loan eligibility

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Budget

Food Eat in the chow hall (barracks personnel)

Use the commissary & buy generic brands

Use coupons – Sunday paper, websites, MCCS PSC, etc.

Use a store which “price matches” & use store brands

Minimize eating out

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Organize

For bill paying, bank statement reconciliation, filing, etc.

Create file folders – for different accts. paperwork Credit union/Bank Investments Loans Insurance Estate – Wills, etc. Tax returns Etc.

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Organize

Create monthly bill summary List bills in date order to be paid (prevent missing one)

Set-up “in-baskets” (bills) – if not automated (recommended)

1) 1-15th, 16th-31st

2) Folder – Bills paid, Tax receipts

Balance your checkbook monthly! Check for fraudulent activity

Consider consolidating accounts Credit card Bank accounts Investment accounts Simplify

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Debt & Credit

Debt – Avoid it! Except for assets that increase in value

Student loans (investing in yourself, your job) Home mortgage

Borrow to invest in yourself/home – yes

Borrow to consume – no

Keep non-home debt less than 8% of gross income (preferably zero)

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Debt & Credit

Debt Paying off debt (if you have “bad” debt), i.e.

credit card balances, other “consumption” loans

Highest interest rate card/loan first Pay maxed out credit card first - if you need a loan

soon Avoid credit score decrease

Don’t pay lowest-rate debt first unless Multiple, significant bills And you NEED confidence, momentum

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Debt & Credit

Credit

Have a savings and checking account Establish a “line of credit” on your checking account

(alternate emergency fund) and “overdraft” protection as well

Use cash for most daily spending (vice cards – credit or debit) Psychologically harder to spend it (& may save you

interest $)

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Debt & Credit

Credit

Use a rewards credit card to help build credit record/credit score

But pay it off in full monthly (otherwise get low-rate card) For cell phone bill for example Look for no annual fee card with at least 21 day grace

period Stay under 30% of your credit card limit, preferably

under 10% (debt to credit ratio) Don’t close credit card accounts – just cut up the card

(decreases credit score) Use credit card occasionally to prevent closure (& score

decrease)

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Debt & Credit

Credit report (history) and credit score (prediction of whether you’ll pay) Get a credit report at least annually –

annualcreditreport.com (free)Credit score affects:

Applying for a job (reliability) Renting an apartment (including deposit amount) Making deposits on utilities, cell phones (lower score =

higher deposit) Credit card, Car, Home & Student loan interest rates

(lower score = higher rates) Car & Home insurance rates (score predictor of likelihood

of filing claims)Credit score measure of how responsible you are!

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Debt & Credit

FICO Credit Score: 300-850 (>760 Excellent, <660 Low) Components:

35% - Payment History (Pay on time!) 30% - Amount owed (Keep under 10% of card limit) 15% - Length of credit (Longer better) 10% - New credit (Number of applications and time since applied) 10% - Type of credit (Variety, installment loans better than

revolving/credit accounts)

Check credit score well before taking out any large loans (i.e. house, car)

Get off credit card solicitation lists 888-567-8688, or Optoutprescreen.com

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Adequate Protection (Insurance)

GeneralProperty (Home/Renters, Car)LiabilityDeathDisabilityHealthLong-term care (LTC)

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Insurance - General

Insurance is about risk management Insure against catastrophic losses, i.e. death, serious

illness, damage to house, car accident

Higher deductible = lower premiums Part of emergency fund can cover deductible as required

Self-insure or insurance contract

If you can’t afford to replace it, insure it

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Property Insurance

Car Insurance – Main necessary components Bodily injury liability – to others

Property damage liability – to others

Collision – Fix own vehicle (from accident)

Comprehensive – Fix own vehicle (from fire, theft, vandalism, etc. – Know specifics & limitations)

Uninsured motorists – Your medical – many states require

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Property Insurance

Car Insurance Check discounts for:

Safety equipment Multi-policy (i.e. car, home insurance with same company) Driver education class Good student

Cancel collision & comprehensive when amount annual premiums >10% of car’s value

Get recommendations from others

Shop around!

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Property Insurance

Home Insurance Property & Liability coverage

Replacement cost coverage better than Actual cash value (which is minus depreciation)

Guaranteed or Extended Replacement cost even better

Ensure adequate coverage for “possessions”

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Property Insurance

Home Insurance Check discounts for:

Multi-policy Smoke detectors Fire extinguishers Sprinkler systems Burglar alarm systems

Shop around!

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Liability Insurance

Car & Home insurance provides some protection (for you and your assets)

As your net worth/assets increase (above limits in car/home policies) consider “umbrella” policy

Helps address any lawsuits!

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Life Insurance

Replace income if you die (main purpose) Who depends on your income?

If no one, maybe just enough for funeral expenses

If spouse/dependents, determine needs: Funeral & final expenses Mortgage balance Other debts/one-time expenses College needs Income (annual) needs – For how long? SGLI alone may not adequately address above Consider/deduct investments appropriately

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Life Insurance

Think Term insurance – pure insurance

Other life insurance (like Whole life) includes investment component

Ensure no war clause in any policy

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Disability & Health Insurance

Military basically provides disability coverage & Tricare provides for health coverage

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Long-Term Care (LTC – nursing home) Insurance

Start thinking about in your 40s/50s

Think about self-insuring if enough assets (>$1.5M)

Otherwise consider some LTC insurance since 60% of those over 65 will require LTC at some point

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Tax Planning

Adjust withholding (W-4) to claim more allowances to get bigger paychecks (to minimize refunds)

Reduce income (Adjusted Gross Income – AGI) Thrift Savings Plan (TSP) contributions Traditional IRA contributions Student loan interest paid Etc.

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Tax Planning

Take/increase deductions (If “itemized” deductions > standard deduction) Mortgage interest State & local taxes Gifts to charity Real estate taxes Personal property taxes (vehicle registr.) Etc.

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Tax Planning

Take applicable tax credits Earned income credit (EIC) – income limits College expenses (American Opportunity, Lifetime

Learning) Child tax credit – income limits Child care tax credit Retirement Savings Contribution Credit – income

limits

Postpone deductions if higher tax rate next year

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Tax Planning

Investments – Tax diversification – Paying taxes now vs. later Ex.

Roth IRA – Pay taxes now Regular TSP – Pay taxes later

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Saving & Investment Planning

Saving

Save 20% of gross income (before taxes) – Pay yourself first!

10% short-term & medium-term goals (& college costs)

10% retirement

Time is your ally – or your enemy (procrastinating)

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Saving Short-term savings – should be easily accessible Credit union/bank account Money Market Fund (MMF)

Start with emergency fund - $1-2K minimum (ex. for car repairs) If family/dependents – save 3 mos. living expenses

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Saving Save ½ of your Cost of Living Allowance (COLA)

Save “excess” BAH

Save ½ of promotion raises

Save ½ of deployment pay

Save ½ of reenlistment bonuses

Save ½ of tax refund

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Savings Deposit Program (SDP) – For combat zones

Earn guaranteed 10% interest annually $10,000 maximum contribution Can’t start until after deployed to combat zone for 30

days (must be getting hostile fire pay) Account closes to contributions after redeployment Account earns interest until 90 days after

redeployment Can do via cash, check or allotment Account closed & funds returned 120 days after

redeployment

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Investing – Start early (now) ! – when you get your 1st job

Educate yourself further

Consider: Goals Timeframe (Longer = more risk/return possibilities) Returns (preference) Risk tolerance (don’t lose sleep) Inflation (3.3% avg. annually for last 95+ yrs) Taxes (but don’t let them dictate your investments)

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Investing

Don’t invest in what you don’t understand (or can’t explain)

If it sounds to good to be true, it probably is

Check out closely any military-affiliated organizations – not all the same caliber

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Investing

Allocate investments across primary asset classes

Stocks – Ownership of a company (via shares) Bonds – Lending money to an organiz. (commercial/govt.

for specific period at fixed interest rate) Cash Other – Commodities (i.e. gold, oil), real estate, etc.

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Investing

Diversify fully within asset classes Ex.

Stocks – Small, Medium, Large, Growth, Value, Foreign companies, etc.

Bonds – Corporate, Government, Mortgage-backed, etc.

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Investing Mutual Funds – Collection of stocks and/or bonds

Index funds – Fund which tracks a particular market index (i.e. Dow Jones Industrial Average - DJIA, S&P 500)

Actively managed funds Load funds – Fund with sales charges or commission

(avoid) No-Load funds – Funds with no sales

charges/commission

Exchange-Traded Funds (ETF) – Similar to index fund, but trade like a stock on an exchange (price changes throughout day)

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Investing Select investments rationally (vice emotionally)

For mutual funds, consider: Fund’s objective (Capital appreciation, income, both) Long-term performance (5 yrs.+) Manager tenure (longer better) Low expenses Low portfolio turnover (less taxes) Volatility/risk

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Investing Boring is usually better!

ETFs/Index Funds (outperform majority of actively managed funds) ETFs – Use only company which doesn’t charge

commissions

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Investing

Reduce expenses & control/diversify taxation Minimum goal: <1% expenses for stock funds, .5% for

bond funds

Taxable accounts – For index funds & ETFs

Tax-sheltered accounts – For taxable bonds, actively managed stock mutual funds, & commodity funds (generate more taxes)

Automate investments (monthly) – Dollar cost average

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Investing

Short-term goals (1-3 yrs.) High interest savings accts. Money Market Account (MMA) – Credit unions, banks Money Market Fund (MMF) – Mutual fund companies,

brokerages Certificates of Deposit (CDs) – Short-term

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Investing

Medium term goals (3-7 yrs.) Bond index funds

Treasury notes Corporate (short-term) Mortgage backed

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Investing Long-term goals (College for kids)

New Post-9/11 G.I. Bill – Transfer Eligibility

“529” College Savings Plans – State-sponsored Age-based plan Normally limited number of stock/bond mutual fund

choices Investments grow tax deferred Withdrawals for college tax-free Some states offer tax deduction for contributions or

income exemption on withdrawals Donor controls $, not beneficiary High $ contribution limits

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Retirement Planning

Individual Retirement Accounts (IRAs) – Savings acct. with tax breaks

“Basket” for stocks, bonds, mutual funds, CDs, etc.

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Retirement Planning

Roth IRA $5K contribution limit annually (2012) – With after tax

$ +$1K if 50+

No required minimum distributions (RMD) at 70 ½ - heirs can inherit tax-free

Withdraw contributions tax-free and earnings tax-free (after 59 ½)

Income limits ($110K/$173K – 2012) – but can contribute to traditional IRA then convert to Roth IRA

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Retirement Planning

Roth IRA – Consider low cost ETF or index mutual fund

Lifecycle (Target-date retirement) funds

Automatically rebalances asset allocation over time – from more stocks to less stocks, & less bonds to more bonds

Automate monthly investments

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Retirement Planning

Maximize Roth IRA first, then TSP If you expect your tax bracket to increase by the time

you retire & withdraw funds

OR

Use traditional IRA (vice Roth), then TSP If you qualify for deduction (income limits $58K/92K -

2012) & you NEED financial boost now

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Retirement Planning

Thrift Savings Plan (TSP) Government retirement savings plan (401K-like)

Defined contribution plan (vs. defined benefit plan like military pension)

Before tax contribution & tax deferred investment earnings Taxed as ordinary income when withdrawn (higher tax

rates)

Ultra-low expenses

$17,000 contribution limit (2012) - +$5,500 if 50+

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Retirement Planning

Thrift Savings Plan (TSP) Think “L” (Lifecycle) funds

Automatically rebalances asset allocation over time – from more stocks to less stocks, & less bonds to more bonds

L2050 Fund – Starts at 90% stocks, 10% bonds• By 2050, has 20% stocks, 80% bonds

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Retirement Planning

Roth TSP coming – in June 2012 Like Roth 401K Contribute after-tax funds $17K maximum contribution (2012) Tax-free earnings after 59 ½ Must begin required minimum distributions at 70 ½

Save 10% in retirement (long-term) accts. total – Use low cost ETF/index funds if & when IRA & TSP

maxed out

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Retirement Planning61

*Saving & investing $200/month at 7% interest rate

Retirement Planning

Keep your hands off retirement $ until retirement! Forfeit $ growth potential & compounding Premature taxes 10% withdrawal penalty (some exceptions)

By age 40 (if not before) start working to determine potential monthly retirement expenses

One benchmark - Retire with 20 times annual expenses that are NOT covered by pension or social security

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Estate Planning

Disposing of assets after death/other matters

Will – Get one (if don’t already have) – include guardian designation for kids

Durable (financial) Power of Attorney (POA) – Someone to manage your financial affairs if you’re incapacitated

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Estate Planning

Disposing of assets after death/other matters

Medical POA – Someone to make health care decisions if you’re incapacitated

Living Will – Decide on artificial measures (life support, etc) to sustain life when near death

GO TO LSSS!

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Execute (the plan)!

Implement your plan!Willpower & StaminaDisciplinePatiencePerseveranceAssistance – if/when required

Read, do some research

Just do it!

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Monitor/Reassess

Review at least annually!Adjust as necessary based on:

Financial situation changes Goal changes Personal situation changes (marriage, children, etc.) Tax law changes

Review asset protectionMeasure investment performanceReview income tax reductionsRetirement plan re-examination

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Summary

Determine your starting point

Decide on your goalsDevelop a budgetGet organizedAvoid debtUse credit

responsiblyInsure yourself &

your assets adequately

Minimize taxesSave 20% of your

gross incomeInvest wiselyMaximize

contributions to IRA, TSP & other tax efficient investments

Get your estate documents in order

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Resources (some)

Books Your Money or Your Life (Vicki Robin & Joe Dominguez) All Your Worth: The Ultimate Lifetime Money Plan (Elizabeth

Warren & Amelia Tyagi) The Four Pillars of Investing (William Bernstein)

Personal Finance Magazines Money Kiplinger Personal Finance SmartMoney

MCCS Personal Financial Managers (PFMs)

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Internet

General Cnnmoney.com Kiplinger.com Smartmoney.com Finance.Yahoo.com Money.msn.com Getrichslowly.org Wisebread.com Consumerreports.org Mymoney.gov Militarymoney.com USAAEdfoundation.org

Budget Mint.com Wesabe.com

Credit & Debt Creditkarma.com Bankrate.com Myfico.com Nfcc.org

Insurance Insure.com Insweb.com

Resources (some)69

Resources (some)

Taxes IRS.gov (Publication 3, Armed Forces Tax Guide) Turbotax.com

Saving & Investing Morningstar.com Saveandinvest.org Savingforcollege.com TSP.gov Investopedia.com

70

for military personnel personal finance basics 1 ltcol. m. hensen, 3d mlg

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