Sunday, June 30, 2013
Finances for the Junior Officer
Newly commissioned Ensigns will typically spend 2-12 months in a training pipeline before they get to practice any tactical skills in a multimillion dollar Navy platform. All this training pays off (we DO have the best Navy in the world), but we spend surprisingly little time training on other basics, one of which is financial planning. Considering that we spend more time in physical training in high school than any financial courses, and that having bad finances can wreck your security clearance, after commissioning you need to consider where you sit on finances and have a robust plan.
But, how do you do this?
After commissioning, I recommend every new Ensign take the following financial-related actions:
1. Locate every account in your name that has money in it and write it down.
This involves calling your parents and asking them where they may have saved money in your name. You need to know what you own. If you check your accounts online, you probably want to write down where every account it located at, as well as account numbers and passwords (and lock it up or encrypt it!).
2. Establish what accounts have what purposes, and automate the majority of it.
Maybe you want Bank A, with credit card A, to be your travel account and bank B and credit card B to be your "pay all the bills account." You can do what's easy for you, but you need to write it down. Also, where possible, get your bills automatically paid monthly with a web bill pay of some kind. Automation reduces the risk of a late payment.
3. Setup a rainy-day fund of 10,000 dollars.
Start putting money into a rainy-day fund. I use a high-interest savings account that I deposit money in on a regular basis. 10,000 dollars is a lot of money, but you can work to that over 2 years (put away 400 a month). The safety net is for when disaster strikes: you wreck your car, your house floods, etc. It keeps you from having to go back to mommy and daddy, and gets you into setting financial goals.
4. Know when all your debts will be paid off.
Got student loans? Start using a loan calculator and figure out when they will be paid off. I recommend having all loans paid off by the time your first commitment (normally 5 years) is up. That way, should you decide to leave the Navy, you can do so debt free. You can pay more than the minimum amount each month on your loan to get it paid off faster; use a loan calculator to figure it out, or simply call the company.
Debt is not a bad thing if you control it. Paying off debt will help you build a better credit score. But debt doesn't go away quickly. You need to chip at it month by month, and that is much easier to do if you start early.
Don't forget about your spouses debt too. I added extra money to her student loans so that our new SUV and her loans are all paid off at the end of the same year. We had to squeeze down on some of our lifestyle, but I'm safe in the knowledge that should I not select for my next rank, I can leave the Navy and not have massive debt hanging over my head.
5. Know your credit score.
Go to https://www.annualcreditreport.com/cra/index.jsp for your free credit score. Put a reminder to check it every year and ensure it is accurate with all three agencies. If there are mistakes, get them fixed ASAP. Once you start moving around, it gets harder and harder to remember what happened two years ago, and you don't want a surprise when you're going to purchase a home.
6. Build a monthly budget.
After you get your first LES (learn to read it here), look at block 19, double it, and plan out how you will spend that money each month. Put in all your debts, electric bill, gas, food, and savings, and see what you're left with. Then, make sure you put some of the money towards fun. If you try to scrimp/save everything, you'll eventually get frustrated and go on a spending splurge and destroy your savings. Spend money on yourself and enjoy it! You earned it.
7. Before you buy a house or car...
a. Factor in the cost of monthly maintenance (gasoline, oil changes, electric bills, insurance, etc.)
b. Factor in closing costs (where are you pulling 5-10 thousand from?)
c. Decide what you would do if you suddenly got assigned to Bahrain and couldn't take it with you or sell it
d. Actually READ everything you sign your name to
If you aren't able to rent out your house for E5 BAH, or pay for an oil change on your car...you might be jumping in over your head. Car and Home debt are MASSIVE compared to your salary. Treat them with care and ask a lot of "what if" questions before you go all-in. It helps to get a few people's opinions that have made those purchases in the past as well before you do that yourself.
Still worried? Call your credit union or bank for help. Ask a Command Financial Specialist. Do what you need to until you are comfortable with your decision, because you may own it for 30 years.
8. Save for retirement.
Use TSP, a 401K, or some method to save for retirement. That way if you leave the Navy before 20 years, you can take something with you.
9. Set financial goals and WRITE THEM DOWN.
For example, let's say you commission with 10,000 dollars in student loans. You may have the following goals:
- Within 6 months, save 3,000 dollars in a rainy-day fund, maintain no extra credit card debt from month to month, automate all bills, and keep rent and utilities at BAH. Bring the principal on my student loans to 7,000.
- Within 1 year, have 5,000 dollar rainy-day fund. Student loans brought down to 5,000.
- Within 2 years, have 10,000 dollar rainy-day fund and no student loans.. Buy a new car, but keep the monthly payment below 400 dollars so your pay increase for promotion to LTJG covers it.
10. Give to charity.
Put aside some money for charity. It doesn't need to be a lot. Pick your favorite charity and give 10 dollars a week. Maybe you give up two Starbucks Lattes a week, but you'll get more satisfaction out of it.
If you do the ten steps above, you will truly own your financial situation. Not only will you survive if the government is late on paying your salary, but you'll have enough in case something bad happens to you. If you decide to leave the military and it takes you a month or two to find a job, you won't be out on the streets. Plus, you'll have a plan to perhaps rent out your house in the event you have to move overseas and can't sell. You'll be ready for the most likely financial pitfalls to hit you, so that you can concentrate on your job instead of your financial situation.
Seth Godin also has some well timed thoughts on money here.