BARRACKS CASH: A Military Guide to Better Saving and Spending
Mark Cowett is an interesting character. He is a University of Chicago undergraduate with a BA in History as well as an MBA from Yale University — so he obviously has some brains. Aside from brains, he has some substantial brawn. Mark spent four years as an active-duty Marine Corps officer and has served in the Reserves for over three additional years. He also has a black belt in the Marine Corps Martial Arts Program and has served as a martial arts instructor-trainer for six years, training Marines in tactical hand-to-hand combat techniques.
I first met Mark at the University of Chicago via a chance encounter in the gym, where I was working on finishing my PhD dissertation after taking a four year “sabbatical” from the program to serve in the United States Marine Corps (back story is here and here). I learned that he was soon graduating from the University of Chicago and had plans to serve as a United States Marine.
Mark immediately struck me as extremely intelligent and organized. He was on track to graduate in just over three years, having written his senior thesis during his junior year, and had already completed Marine Corps Officer Candidate School as well.
Mark would go on to serve honorably as an Air Support Control Officer, with deployments to Japan and Iraq. Upon return he entered the Yale MBA program. During his time at Yale, he felt compelled to help those who serve, many of which are under-served when it comes to financial advice. During his “free time” between job hunting and completing his MBA courses, Mark drafted up “Barracks Cash.” With little time and no platform, Mark faced obstacles when chatting with publishers, who are understandably interested in profits, but not necessarily interested in pro-bono publishing efforts that support a great cause.
Fascinated with Mark’s manuscript, and excited for an opportunity to help him share his knowledge and experience with the financial community, I suggested that Mark “open source publish” his manuscript via our blog. The hope is that our readers, and those inspired by our mission to empower investors through education, will help place this manuscript in the hands of veteran’s who are looking for some basic blocking and tackling financial advice that is written in a way that they can understand and appreciate.
Thanks to Mark for generating this book. The opinions and insights in this book are entirely attributable to Mark and if you would like to speak with him directly, please submit a request.
Mark, thanks for serving our country in uniform and for continuing to serve after you’ve put your uniform on the shelf.
- Chapter 1: Lifetime Goals
- Chapter 2: Short-term goals
- Chapter 3: What does debt really mean?
- Chapter 4: How to Avoid Debt
- Chapter 5: Your military salary
- Chapter 6: A different kind of R & R: Risk and Return
- Chapter 7: “The Spectrum”: Things to do with your money
- Chapter 8: Blowing Money
- Chapter 9: Speculating
- Chapter 10: Spending
- Chapter 11: Saving
- Chapter 12: What is Investing?
- Chapter 13: Why Should You Invest?
- Chapter 14: How Should You Invest?
- Chapter 15: How NOT To Invest
- Chapter 16: Investing and Saving: A Perfect Combo
If you are reading this page, I salute you. You are presumably serving, or have served, in the military, or maybe you are one of the millions of Americans with the unique experience of being in a military family—and thus in a position to benefit from what this book has to say.
Even more importantly, congratulations. You were inspired by the prospect of achieving your financial goals (or perhaps just by the front cover of the book) to the point where you were willing to turn to the first page and begin reading.
The core message of the book can be reduced to three areas:
- A profile of unique financial issues faced in the military, and how to deal with them…and maybe even make yourself some money in the process.
- A look into the military psyche (avoiding as much scientific jargon as humanly possible), and how it affects our financial decisions
- Most importantly, some good solid reasons as to why you should care about your finances. Since it is the most important theme of this book, I will lay it out right now, before you have to decide whether to turn to Page 2:
You decided to serve your country. Whether it was decades ago, or just last week, you raised your hand and, as one veteran said, “wrote a blank check, made payable to the United States of America, for an amount of ‘up to and including your life.’” You chose to defend our country, including not only the people who live in America, but also the political and economic systems on which our country is based. The decision to do so was motivated by patriotism and a sense of duty, and those whom you serve with, no doubt, are there with you because they had the same feelings when they joined as well. Paychecks alone do not create the most powerful military on the planet, and while financial motivation isn’t our cause for serving the country, there is no reason why you shouldn’t benefit from the economy and society you protect. You, the American military service member, deserve financial security and success.
YOU’VE EARNED IT.
For that reason, it is crucial to know how to manage your financial future. We are, after all, unique not only in our professional lives, but in our personal ones as well—including our finances. Especially our finances. How many of our civilian friends know exactly where their next year’s worth of paychecks are coming from? How many of them know exactly how much those will be? Unlike them, we have the certainty of a government-backed salary, twice a month, every month, for as long as our current contract remains in place with the military (If you’re thinking about smoking pot on your next 96-hour weekend, this may not apply to you). Moreover, we know how much our colleagues make, to the very cent, and what our salary will look like if and when we get promoted (No, there is no shame in savoring the idea of a big pay bump that comes with that next rank. Just save some for your now-grotesquely-priced Marine Corps Ball tickets). All this certainty is pretty reassuring, right? Oh, by the way, if you have dependents, they’re covered too. Medical, dental, housing allowance, and on and on—it’s all taken care of. If you haven’t lived as a civilian adult before, all I can say is the following: The recruiters told you the truth about one thing–you won’t have to worry about your bills while you’re in the service.
None of this should seem particularly new to you, of course. What may seem new, though, is this question: How are you really benefiting from this? All these guaranteed paychecks, all these guaranteed benefits—they provide a lot of answers that many civilians find themselves losing sleep over. But do we really take advantage of it?
Think back to your first duty station. Your first paycheck out in the operating forces, after boot camp and MOS training were over. What did you do with that check? Did you put half of it in a low-cost S&P 500 Index fund, a small portion in U.S. Treasury bills, another 20 percent into a savings account, and the rest toward a 401(k) contribution?
(Some of you are wondering: What the HELL did he just say?)…That’s okay to wonder. We’ll get into that later, and it’s a lot more fun than it sounds.
The answer, of course, is, “Probably not.” For some of you, maybe this was actually the case, but if you’re that savvy with money, you can probably move down the aisle of whatever bookstore you’re standing in, and open up some more complicated book on investing with a lot of Greek symbols and exponents–Wes has a few examples. For many of you, though, my question earlier, “What did you do with it?” probably got you thinking. That video game console. Those Air Jordans. The 62-inch flatscreen (plasma?). How about that car? Wait, the interest rate was WHAT on that auto loan? Ah, but you made the payments. With that new payday loan, of course.
This may sound insulting, and if it does, don’t take it personally. If it doesn’t apply to you, it applies to one of your friends in the military. I guarantee it. It may apply to a lot of your friends, and that is, to be honest, not surprising at all. The question then is this: Why is it the case that so many military personnel spend money on things they don’t really need? (Other than the flatscreen, of course. Even I blew money on one of those). The answer boils down to the following: People who join the military are often experiencing their first career-level job. They’ve never had to pay all their bills themselves, since they were usually in high school or college right before they joined, and all of a sudden, when presented with a lot of money that doesn’t have to go toward water, power, and gas, they don’t know what to do with it. There are options like saving it up for the future, but that seems so boring, and besides, eBay and Amazon are calling your name (probably on your free Internet).
There are other reasons, too. As mentioned earlier, we military personnel did not join for the sake of racking up cash and becoming super-rich. If we were that kind of person, we wouldn’t be where we are. Naturally, we don’t spend most of our waking hours thinking about how to make extra money, and that’s okay. But our financial education, our financial intelligence, is not always on par with a lot of civilians who know a thing or two about stocks, mutual funds, investing, and all that stuff. Since the alternatives to just spending our money aren’t always so clear, it seems logical that we should go for the simple solutions—after all, isn’t that what we are taught to do?
That brings me to the last point here—in the military, you’re trained to make snap decisions. You have to. Dawdling and delaying and contemplating every detail of your future actions, while prudent in some cases, does not win battles. Nobody in boot camp ever demands from their drill instructor an explanation as to why inspection arms is conducted the way it is. We’re in the military because we can make quick decisions on our feet, and stick with them come hell or high water. That’s the kind of people we are trained to be. Does it seem natural, then, that we should be the kind of careful savers who pinch every penny, worrying about whether or not to buy that higher-quality HDMI cable? No, of course not. In fact, it doesn’t seem natural that we should pinch any pennies. We’ve got our salaries, we’ve got our food and living quarters and just about everything else we really NEED. However, our jobs are not always pleasant (often, very much the opposite) and we deserve our rewards. Yes, there is free Applebee’s on Veterans’ Day, but what about the other 364 days of the year? We want to treat ourselves! Bring on the plasma flat screens. Bring on the shoes, and the iPhone 6’s (the latest version, at the time of this writing), and, let’s see, we will need an iPad mini. If you just came back from a combat tour, it could have been the worst experience of your life. All that deployment money is just sitting in your bank account—maybe a new BMW would make life seem a lot better. And you know what? It’s totally understandable. Absolutely completely 100% normal. As said on Page One: You defend your country. And you’ve made money in the process, and there is a lot of stuff to buy. Go for it, you’ve earned it.
There is one consideration, however, which may or may not make you want to keep turning the pages of this book.
What happens when you get out of the military?
What happens when you get out of the military, when you have kids (or grandkids, for some of you sergeant majors out there), or get married? Most of you, if you stay in until you have served 20 years, will retire from the military around the age of 40. You will have a retirement pension, a lot of VA benefits, the GI Bill, maybe a job lined up, and…what? What did you do for yourself while you had 20 years of paychecks coming in? Do you have a house yet? What else?
There’s more to it than that. A lot of us, yes, want the American Dream: a house, a nice car, a family, and an NFL team that makes the playoffs every year with a franchise quarterback. Some of you may not—maybe you want something different, or maybe you want something MORE. Maybe you want two houses. Maybe you want three cars. Maybe you want to OWN an NFL team that makes the playoffs every year. It sounds crazy to think about, but one thing is certain: It is always possible.
No matter where you came from before the military, no matter how much you make right now, no matter what your situation is, remember that the country you serve is, if nothing else, supportive of you, a military service member, and that the political and economic systems you’ve signed up to protect are meant to help you prosper as well, just as much as anyone else. Nothing is perfect, but whatever your goal is, however big a house you want to live in some day, however many acres you want your dream farm to be, whatever it is…it is not impossible to achieve.
You just need to figure out how to get it.
So, keep reading.
Fifty inch screen, money green, leather sofa, got two rides, a limousine and a chauffeur
-Notorious B.I.G., “Juicy”
This chapter may not be as informative as others that will come later in this book, but it is probably the most important—especially if you want to own the NFL team. The point of this chapter is to get you to think about your lifetime goals, both financial and non-financial. For most of you, this probably isn’t too difficult. Most people, not all, but most, want the same things: a happy marriage (some day), kids maybe, a nice house, a truck or a BMW or both, and the ability to kick back and throw down some beers while watching your team crush their division rivals. Nothing too hard, right? When the right person and the right job comes along, most of these things should come our way, especially for us New England Patriots fans, at least until Tom Brady retires.
What else is there? A lot of military service members have other goals, things that often will define our lives as probably our most significant contribution to our society and our country. Deploy to Iraq. Afghanistan. Get promoted. Maybe, even, become known as the best pilot, infantryman, martial arts instructor, surface warfare officer, whatever it may be, in our service branch. There are a thousand different specialized jobs in the military, and while listing and describing them all would take more pages than this book contains, it’s a good bet that there are plenty of service members who aspire to great things within their specific MOS, their service branch, and the American military in general. After all, did anyone join the military with the specific desire of NOT doing great things?
It is fair to say, then, that ambition is plentiful in the military. We all want great things, if not for ourselves, then for others—our families, our fellow service members, our country. Another unique aspect of the military, of course, is the bond between the service members. We are trained to, and naturally gravitate toward, caring for our fellow Marine, soldier, sailor, and airman. We have to. We choose to. We wouldn’t be who we are without that selflessness. It is that aspect of our professional demeanor and conduct that sets us apart from so many others, and for that reason, we are naturally inclined to care more about others than we do ourselves. And there is nothing wrong with that.
What is crucial to think about, though, is the importance of caring about ourselves in the right ways. Just as you (hopefully) stay in good physical shape in the military, so that you might someday be able to better serve your fellow service member, you are also expected to keep your personal affairs in order. This includes, but is of course not limited to, your marriage or relationship (if applicable), your children, and a million other parts of your life that don’t appear on a service uniform badge. Naturally, your command, if it is truly competent, will take measures to ensure that you and everyone else in your unit is functioning well on this personal level. We all know that when service members’ personal lives are in good order, they function better with their units.
This is all stuff you’ve probably heard before, though. You’ve all hopefully heard someone tell you that your unit will help you take care of your personal issues. Is there anything missing, though?
Does your unit help you manage your money? Is there anyone there, looking out for you, making sure you don’t fall into bankruptcy? Does anyone ever check in with you, asking whether or not you’re saving money for the future, when you don’t have the ol’ reliable military paycheck and all those benefits?
The answer, as you know, is usually “No.”
Why is this? There are a number of reasons. Your bank account is your own personal property, and it’s your own life—nobody else’s. It is not your platoon sergeant’s business whether the $30 you spent last month went toward Spongebob bed slippers, or a couple seasons of It’s Always Sunny in Philadelphia on DVD, or that knockoff NFL jersey sold in South Korea just outside Osan Air Force Base. It is nobody’s business whether you have, say, medical expenses that you choose not to share with anyone, or whether you went to Gen Sushi in Okinawa six times in four days because you’re PCSing next week and you know you won’t be back in Japan for a long, long time. Unlike nearly EVERYTHING else in the military, how you spend your extra money is your call, and as long as you’re not doing anything illegal in Thailand, or anywhere else for that matter, there are almost no rules.
Crazy, isn’t it? How awesome it that? Just think, after all that time doing exactly what you’re told for the entirety of your basic training (and most of your follow-on training schools), you are free to go off base and just buy something. Do whatever you want. Drink a beer. Drink five. Get a tattoo. Get five. Buy a car. Buy…well, two. And why not? After all, you can!
Maybe you just got back from a deployment. You haven’t been able to spend money in six months! Maybe a lot longer than that, in fact…a year! And isn’t convenient that the BMW dealership is right outside the base? You just spent all that time overseas, and now you’re back in America, hearing all these new songs on the radio that you haven’t kept up with. Even better, there’s the good ol’ In-and-Out Burger. God knows they serve better burgers than the DFAC over in Kuwait. How incredibly glorious is it to cruise through the drive-thru in your new BMW, grab a double-double or three, play a lot of new music that seemingly has been produced all at once, just for your enjoyment, and then head down to the nearest bar to really make up for all those months of lost time?
Oh, glorious beyond description. Could be the best night of your life, assuming you don’t do something stupid. Could be the best week, maybe the best month, of your life.
Combat deployments are, without a doubt, life-changing experiences. What happens over there will always be a part of your memory, will always be a part of who you are. That’s just how it is. But after the welcome-back party is over, and you’re back on your base, and you still have to get up at 0500 for that squad run, what’s left?
What’s left after your first paycheck is spent? This, too, is a tough question. Great memories, of course, probably some hilarious photos up on Facebook, and maybe some new friends. Probably a lot of old friends too, with whom the celebration of being off base, or back in America, is such a tremendous occasion that you’ll cherish the memory forever. It is, after all, a great time. But what have you done for your future? When all the deployments are over, all the parties off base are done, everyone has been promoted and retired and PCS’ed away from you, what have you accumulated for yourself?
Well, who cares?
A lot of people don’t, especially in the first few years of their military service. Who cares about buying a house, when you’re not married and have no kids? Nobody’s going to live in a four-bedroom by themselves, after all. You may still be stuck living on base, so that 160-acre ranch with livestock and corn and soybeans in Colorado is not exactly something you can just open for business tomorrow, especially when you are deploying again next year and you have nobody lined up to feed the horses. The truth is, there is almost no way in hell you can possibly grasp the idea of a long-term goal, particularly a long-term financial goal, when you are presented with both the immediate desire AND the immediate option of enjoying yourself right then and there. Remember, you just got that first paycheck…those Coronas aren’t going to just walk into your barracks room all by themselves (to all you E-3’s and below, though, when you’re under 21 and face a surprise health and comfort inspection at 0600, this is a crafty story to fine-tune).
Here’s a challenge for you, but one that is critical. This is the entire point of the chapter, and really the whole book. In a multi-class financial planning seminar taught at one Marine reserve unit, this is the one and only “homework assignment”.
Come up with a goal of some THING that you want to have for yourself at some point in your life. ANYTHING you want. Spaceships and private islands included.
Give it a try, and see what you can think of. A big house on the beach, a small business, a big business, the NFL team, something that you would be really happy with that you’d like to try and get sometime before you are really old and have ten grandchildren tossing your hand-written birthday cards aside as they look to see how much money you sent them this year.
Now, write that goal down. Quick, before you decide it’s impossible or someone comes along and tells you it’s stupid. Write it down, and remember it, because that, too, is something that nobody else can take away from you.
This chapter may have gotten you to think a little bit. You may have just looked back on that first night after redeployment with fond memories. If so, that’s awesome. What the rest of the chapters will do, now, is to explain to you how best to get to that goal. Will it happen exactly as you planned? That almost never happens…but it just may. There is almost always a way, though, and it almost always depends on how you manage your money. Read on, and learn how to save, how to spend, and how to clear your mind of all the confusion and just decide what to do.
And what not to do.
For many of you, this will be your favorite chapter (if not, Chapter 8, “Blowing Money”, might be). We are going to talk about short-term financial goals—in other words, any goals you expect or hope to achieve in a relatively short time frame like, say, six months. Or less—how about six hours? A lot of military personnel can probably come up with a lot of short-term goals that can be achieved in these time spans. What are some examples?
In six months, we can maybe save up enough money for a down payment on that BMW we’ve been thinking about getting. Yes, it helps to have OCOLA or BAH that you don’t spend entirely, but it’s possible from a stateside barracks room too.
How about in six weeks? That’s three paychecks. Spend carefully, and you’ll save enough for that PS4 gaming system. Throw in whatever the most recent version of Grand Theft Auto is, and you’ll have a good time this weekend.
Six days…now we’re getting into tough territory. Who can save money in six days? Unless you have a side job as a bouncer at the bar outside base, or some other source in money that comes in every few days, you are probably in the same boat as everyone else—logging onto USAA or Navy Fed on the 1st and 15th of every month and finding your checking account has magically been replenished.
Down to just six hours now. Does anyone have a job where they can go off base at 4:30 in the afternoon and come back by 10:30 with more money? If you do, watch your back. The cops will find out sooner or later.
The same goes for six minutes. Unless you’re at a casino, money doesn’t come easily in such a short amount of time. Even if you, the military service member, do go to The Wynn to try and win some extra cash playing craps, the odds are stacked against you, and you’ll never make a real living rolling dice (this not to say that casinos are necessarily bad places, or that gambling is actually BAD, but we’ll get to that later).
So what have we figured out? We know that it’s hard to earn money (reliably) in a short amount of time, and so saving it up is certainly not easy unless you make plans that you stick to—over a longer amount of time. And that is pretty difficult. Why is it so hard? Well, let’s consider how you get money that you come by quickly, or easily. Imagine the following five W’s:
Who: You and some friends from your squad
What: A trip to a casino in Vegas
When: Friday night, after a week, or three, of training in the desert
Where: The Bellagio at 9 PM, Caesar’s at 11, The Encore at 1, and the Wynn at 2 in the morning.
Why: See the “When” section above
Now let’s come up with an optimistic scenario—you show up to the Bellagio, start playing craps, and ten hours of heavenly happiness later, you’re back in your hotel room, up two grand. Is life not beautiful?
There’s only one problem. What are you going to do with that money? It’s just sitting there in your pocket, calling your name, tapping you on the shoulder and reminding you that you are, for the moment, a wealthy man, and you can do anything you want right now in Vegas (well, almost anything). You’ve never had $2,000 cash in your pocket before. Awesome, right? Almost scary, in a really weird sort of way. One thing is for sure—as strange as this experience is, you want to enjoy the moment. You may never be this lucky again.
You have two options. Actually, you have more than that. You could walk down the hallway and go into any one of a dozen shops, either in or outside of the casino. You could buy a nice suit, or maybe a watch (not a Rolex at the Wynn, though—those go for a little more), or just run all over town today and make a lot of friends with the magic words what are you drinking? You’ll be smart, of course, and have plenty left over for bottle service tonight at The Bank (the party club at the Bellagio). Whatever the case, though, you sat through that mandatory personal finance class with the rest of your company last July, and you are wise enough not to spend it all in one place. One thing you do know, though, is that you are going to make today the best day of your life.
This is the hard part—right here.
Dare to consider one other possibility. Just think about it, if only for a moment. Is there a single thing out there, deep in the back corners of your mind, something beyond today, which you aspire to buy, or build, or have one day? Anything at all? Let’s think real quick…what about that six-week goal we thought of earlier? The PlayStation 4! That’ll be great for the boring-to-the-point-of-tears barracks room back on base.
Or, let’s stretch it here, how about the six-month goal? The BMW. How much for a used one, maybe $20,000? Maybe less, if you’re okay with a lot of mileage. $2,000 will go a long way toward that.
Now, the REALLY hard part—what about something beyond that six months? That house, that restaurant, whatever it is…does it come to mind?
Could it be even remotely possible that there’s something else to do with that money…or at least some of it?
In the military we are, by nature, aggressive people. We like to try stuff and succeed. We like to lay it on the line and we like to win. Fight hard, work hard, play hard, that’s the motto we are taught from day one. Lay your money on the table, come up big, then have the best time you ever had the next day—you earned it, right?
Hell yes. It’s true, you did earn it. You deserve a good time. Good drinks, five-course lunch, lobster dinner maybe, and you are absolutely going to that club tonight. Yes, bottle service too. Notice one thing, though? How much does this all cost? Drinks, maybe $100? Lunch and dinner, $150, assuming you get the good stuff. Club and bottle service…$300, maybe more. Depends where you go. How much did that all cost? Add it up…$550. That’s five hundred and fifty dollars you spent on yourself today. You just went through a week’s salary (or more) in less than 24 hours. You are guaranteed a great time. Maybe one of the best days you have ever had, if it is your first time in Vegas.
Now, was this a bad thing? In this case, not really. You’ll pack up and leave Las Vegas on Sunday morning with $2,000 – $550 – $200 (assume the last $200 for the hotel room). That’s $1,250 cash you take back with you, and you still had a great time that should hopefully keep you smiling for a few more days on your base. But what didn’t you do? Here’s what—you didn’t run around willy-nilly spending the money just because you had it. You took at least a few minutes to think out what you were going to do, and maybe, just maybe, you decided that you could come up with some other uses for that cash. If you’ve never been to Las Vegas, believe me, there are plenty of ways to easily spend that other $1,250. However, you didn’t, and while you’ve only got 2-3 great stories to tell your buddies back home, instead of 4-5, you are going to roll around with an extra twelve hundred and fifty bucks in your pocket, or in your desk drawer, or, yes, in your bank account.
The point of this whole story was to make you think: What do you do when you come across some quick money? It’s just as easily spent as it was easily gained, but with some patience and about five minutes of planning, you can put it to some long-term good too.
To get more technical on the spending side, you should know what “impulse spending” means. It’s what happens when you see something you want and you buy it, without really considering the 2nd or 3rd-order effects of your purchase. The immediate effects, obviously, are that you find something you enjoy, and you have fun with it. How much fun? If you see a bargain in a shop, you may have a lot of fun, especially if it is something you can enjoy for a long time to come (say, a watch that you have wanted for a while). What is the difference, though, between that watch bargain and something else, let’s say, a cool pair of Nikes that you saw for the first time in the window and paid full price for?
There are two big differences, and both will affect how much short-term and long-term happiness you get out of these items. One, the watch was selling for a discount, and so you will pay less money than you might have if it were going for the full price. Now, a lot of people who buy nice watches (Rolexes, for example) aren’t always concerned with saving money, so holding onto that extra $400 isn’t quite as exciting as when you’re a big saver. But keep this in mind—that extra $400 can go to buy a lot of other stuff, if you insist on spending it. You’ll want some cuff links and probably a tie clip to go with that watch, and a flashy ring won’t hurt either. That said, if you are interested in saving money, this purchase is obviously a good deal.
Another benefit of buying the watch that you’ve wanted for a while, rather than the shoes you just saw, is that you KNOW you want that watch. You’ve been sporting that G-shock on your wrist for way too long, and it’s just not cutting it at the club anymore. Finally, you’ll have something to reflect the sun rays, and your long-running desires will be fulfilled. What about the shoes, though? You JUST saw them. Sure, it feels good to get them. Full price, half price, who cares? You got some money from somewhere, you want to spend it, and those shoes look as good as anything else in your line of sight, so let’s fork over the cash and the day will improve immediately. Only one problem—how do you know you’ll still like them in a year? Or a month…or a week? You may think to yourself: They’re shoes, of course I’ll still like them! You probably will. You should trust your own taste of style, obviously. Just think for a moment though, just ONE moment, before you walk up to the cashier. Decide for yourself, right then and there, if in a year from now, you’ll still be glad you spent two hundred bucks on those shoes. Being an impulsive shoe buyer, you know there’s nothing else in the store that you want more. Do you know, however, that there’s nothing else in a day, or a week, or a month, on which you’d rather spend the $200?
The great challenge here, just like the shopping situation in Las Vegas, is resisting that natural bias toward action. It’s difficult. It’s hard as hell. We aren’t trained to do it. But this isn’t a combat scenario where speedy decisions save lives. This is your own personal spending, your own saving, your own bank account. Nobody else’s.
The only person to whom you owe responsible saving is yourself.
Try paying your savings account, “paying yourself,” before you pay others. If not, at least take the time to think before you make these decisions—you may not end up actually saving money, but you will get a better deal like that watch, something you will not regret a week later, and in the long run you will end up having more stuff that you like. Fair enough?
There are some other issues for some military personnel. Many service members are not used to having a lot of money in their bank accounts. When we signed up, it was, for most of us, the first full-time job we ever had. Most people in the military, as with all of American society, come from families that aren’t incredibly wealthy, and may have never had the opportunity to actually save. If you’ve never been in that position, you may think that having money in a savings account is sort of an invitation for someone to come along and spend it, or for it to disappear magically somehow. There are always expenses, bills, a million things that can eat up a paycheck and can certainly devour a savings account, so you may think: what is the point? Why not just spend the money really quickly…at least you can enjoy it before someone else does!
Once you’re in the military, as long as you maintain your own bank account, nobody else can touch it. Not your family, not your friends, not your sergeant, nobody. You can just leave it in the bank and sleep easy knowing it’s still there…as long as you don’t spend it, it will still be there.
As a sort of epilogue to this chapter, by the way, let’s keep going with the casino scenario. You have that $1,250 saved up. You feel good about not spending it, hopefully, and you know you are making progress toward your future goals. Time to start checking out cars? Maybe house shopping? Not to kill the party, but there may be one problem—some of you have $15,000 in car loans, $3,000 in credit card debt, and you still owe “Steve” down the hallway for picking up that beer for you two weeks ago. Well, that sucks. You want to save toward the future, but you’ve got all this other debt to deal with first. It’s racking up interest, increasing every month, and all that money you just got is going to have to pay it down. Where’s the fun in that?
One little hint about debt — and this will save you many, many nights of sleeplessness, and many more days of delaying your dreams and ambitions. There is only one surefire method to avoiding that nightmare, to keep high-interest debt and all the nasty things that come with it from wrecking your dreams. One way to let yourself keep that $1,250 and put it toward that PS4, or that BMW, or that four-bedroom house on the beach.
How do you avoid that nightmare? Don’t get there in the first place…and if you do, get out fast.
To learn more, turn the page.
…and it is GREED that makes your parents refinance their $200,000 house for two-fifty, and they take that extra fifty and they go down to the mall…and they buy a plasma TV, cell phones, computers, an SUV, and hey, why not a second home while we’re at it…
-Michael Douglas, Wall Street: Money Never Sleeps
Debt can be broken down into detail a million ways, but most of what you need to know revolves around a few key concepts that should be discussed together. This chapter deals with most of the glum and depressing parts of personal finance, but the good thing is that if you can get rid of your personal debt and move past it in your life, you’ll not only be on the road to personal financial success, but you’ll also be way ahead of many, if not most of your fellow Americans. There are, of course, some good aspects to debt, which you can read as well…but proceed with caution. Don’t worry—this book is like your personal financial life. After you get past the debt, it gets a lot more interesting. And fun.
So, what is debt? Most debt that we’re familiar with, we went over in the last chapter, when we had $1,250 to play with but suddenly realized we owe Steve for the 30-rack. Oh, and about 18 grand in other stuff. Without diving into Webster’s, we can simply put (financial) debt as the following:
Debt: An amount of money you have to pay back to someone else in exchange for something they did for you, or gave to you, or lent to you. This amount usually has to be paid back with interest.
Interest—one of the most difficult things to deal with. Let’s define it in basic terms:
Interest: Extra money that you pay as a “Fee” for a lender lending you the money that you have to pay back. This extra money also compensates the lender for the risk he took in lending you the money—the risk that you might not be able to pay him back.
Think of it this way. When someone lends you money, yes, they want to be paid for that service, but there’s always the chance that you’ll go bankrupt. Maybe you’re not a responsible borrower, maybe you aren’t trustworthy, maybe you borrowed too much money for that BMW and then you don’t have the same craps-playing skills that you had that first night in Vegas. There’s a million possibilities, all of which a lender considers when they determine what interest rate to charge you. This is all tied in to your credit score, of course, which is why you want to establish a good track record of paying your debts off in full, in a timely manner, and without taking on too much debt to begin with (a good way of ensuring you can do the first two things). If you follow these basic rules, your credit score will generally look a lot better than if you don’t follow those rules. With a higher credit score, you look more legitimate as a borrower—someone a lender can trust.
Either way, though, they’re going to charge you interest. Even with a great credit score, you could still fail to pay them back. What helps the lender is that if they make, say, 100 loans to 100 people just like you, they can handle one or two borrowers going broke. With all those interest fees they rack up, they are covered in the event of you or someone else not paying them back…or you AND someone else not paying them back. Just remember, though, the better your credit score, the more trustworthy you appear to be—and the lower your interest rate will probably be. The lenders don’t need as much interest to re-assure them that everything is going to be OK.
We are all familiar, as mentioned before, with most of the basic kinds of debt. You have probably had plenty of classes on how to get a credit card, why you should make your payments, how to get a car loan, a home loan maybe, and some day perhaps a student loan, though the GI Bill should make that less of an issue than for others. There is plenty of information out there for all the military veteran loan benefits that you’re eligible for. There may even be information on a tough word out there—bankruptcy.
What is bankruptcy? Bankruptcy is technically what happens when you have no more money, like when you played Monopoly as a kid and your friend had hotels on Boardwalk and Park Place and you didn’t have any monopolies. It was only a matter of time before you landed on Boardwalk a few times and paid out that $2,000 in rent, depleting your precious store of orange $500 bills to the point where you could not cover the next Boardwalk visit…and when it happened, you ran completely out of money and lost the game. In real life, it’s not much different. Companies go bankrupt when they run out of money and cannot raise more to pay their debts. Individuals go bankrupt for the same reasons. A person borrows money for a car, then they incur other expenses and can’t make their payments. Maybe they already own the car (and don’t owe money for it) but they have lots of school loans, and they can’t pay them off because they don’t have a job after they graduate. Whatever the case, someone in this position can file for bankruptcy—a certain legal status that protects them from collection agents trying to take all of their possessions. If you owe $100,000 on a loan, filing for bankruptcy can protect you from someone trying to repossess your car to pay for part of that loan. Sounds good, right? With this little Get-Out-Of-Jail-Free card, we can rack up major debts and hopefully pay them off, but if we cannot, we can just file for bankruptcy and maybe keep the BMW anyway.
There’s two issues with that. One is pretty material, and one is more philosophical, but they are both important. First, if you file for bankruptcy, you won’t be able to do so again for a long time. It could be anywhere from six to ten years, perhaps even more, but this magic silver bullet that you use to escape your debts is not going to be available again for quite some time, so if you’re thinking about using it as an easy fix to a less-than-catastrophic problem, think again. Moreover, your credit score will be temporarily trashed. You won’t be able to borrow for a while. It will take you time to rebuild your credit, time that you must spend being very careful with your spending, and VERY careful with your borrowing.
Second, before you file for bankruptcy, think about what it means. It means you took on debts that you couldn’t afford, and in some cases, you were simply irresponsible with your spending. This is NOT to say that everyone who files for bankruptcy deserves a public shaming, or even deserves to feel any shame at all. Bad things happen to good people. Unexpected expenses come up. The military provides tons of benefits that help military families cope with sudden health emergencies, short-term financial difficulties, and deaths in the family, but they cannot solve all your problems, and finances can get completely uncontrollable sometimes. However, if you have it in your power to pay off your debts instead of filing for bankruptcy, or better still, not to put yourself in a position where you are considering bankruptcy in the first place, you owe it to yourself and you owe it to your creditors (the people you owe money to) to pay them back.
If you can pay your debts, pay them. It’s the right thing to do.
Consider your MOS proficiency. You want to be known as someone who others can rely on in any scenario, someone who is dependable and trustworthy. You want to see yourself that way too. Nobody wants to go home at the end of the day and feel like they don’t measure up in the military. One of the worst feelings in the military, if not THE worst, is that feeling that you let people down. It’s no different with your debt. A bank that lends you money is obviously different from your squad buddy, but consider this: Banks and other lenders have to keep money on hand in case borrowers don’t pay them back. When enough people fail to pay them back, they start to get into financial trouble and can’t lend money out as easily to others. When this happens, other companies cannot borrow money as easily, and so it is harder for them to do things like produce cheap goods to buy or hire new workers. This is basically how the American economy went into a big decline in 2008: a lot of people borrowed money to buy houses they could not afford, and when they failed to pay their mortgages, the banks got into financial trouble. Soon, they could not lend much money to companies like General Electric (sound familiar?), which itself almost went bankrupt. This same kind of chain reaction affected thousands of companies and contributed to the massive wave of unemployment that hit America in 2009 and 2010.
There are a hundred books you can read to get more into detail on this, but you’ll find the same basic theme in all of them. When lots of people fail to pay their debts, a nasty chain reaction follows. People who sign a piece of paper binding them to do something they can’t, or won’t do, contribute to a much larger problem that harms more than just themselves, more than just banks, more than just a lot of companies. It harms everyone.
If you are in a platoon and you fail to pull your weight, you fail to keep up with everyone else in any situation, you may get bailed out. There are others there to pick up the slack. That’s how the military works—we help each other out. But you know what happens when A) you continue to fail, or B) everyone fails at the same time. Performance suffers. Things don’t get done. Lives can be lost.
Would you want to be part of the problem, or part of the solution?
It’s a dilemma nobody wants to have to face, obviously, but as was mentioned in Chapter Two, there’s a way to avoid ever having to even think about it, remember? Don’t get there in the first place.
Imagine you are walking down the hallway in your unit building. You see a line of overweight folks in your platoon, all lined up outside the training office, waiting to get weighed in. Again. For the second time this month. They are on BCP, or Body Composition Program, and are under the gun for having too much body fat. You look inside the training office, and there’s one of these guys in there, about to get his neck and his stomach taped as the training personnel do a rough calculation of his body fat based simply on a chart of numbers. He gets off the scale, and from the looks of things, he hasn’t lost a pound since the last weigh-in. He’s still fifteen pounds over his limit, and guess who’s standing right there, ready to deliver this guy’s weekly ass-chewing? Sergeant Major fill-in-the-blank-here. You avert your eyes and keep walking down the hallway, happy to be going anywhere but that office. Since it’s lunch time, you go out to the parking lot, hop in your car, and drive to the chow hall. Five minutes later, tray in hand, it’s time to decide what you’re going to have to eat. If you work out a lot, you opt for that fudge cake in the rotating glass dessert case. If you’re not keeping up with your physical training, though, you choose the steamed vegetables with the boring old chicken breast and the unsweetened ice tea. Either way, though, you know you’ve got enough bases covered to stay out of range of Sergeant Major’s knife-hands. And that’s what you care about most.
Avoiding overwhelming debt isn’t all that different from avoiding BCP. You can make more money and be able to pay more bills, or you can cut your expenses down to fit the budget that your salary allows. It sounds really simple, but a lot of people fumble this because they either don’t do some simple math every now and then, or they fall victim to those Nikes in the display case and forget to consider whether they might not seem so great next week. Of course, buying one pair of Nikes is not going to swamp you in debt. When you do it once, though, it becomes easy to buy another pair (or something else you don’t really need) again. You do it twice, it becomes easy to do it five times.
Before you know it, you’re so used to spending money on stuff you don’t need that you don’t even notice what you’re doing—That is, until you have to borrow twenty bucks from Steve just to finance your beer run. That is, until you try to pay for dinner on a date one night and your credit card is rejected because you’ve maxed out your credit limit.
That is, until you’re ready to finally settle down a buy that house that you love down the street, move your family in, and have that home you can really call YOUR OWN…except you can’t, since your credit rating is awful because you have reliably spent more than you make every year since you joined the military, racking up so much debt to your name that there’s no way an intelligent person would lend you money at a reasonable interest rate.
A lot of people get into bad credit card debt. They rack up some expenses on their card, make only minimal payments to their account, and then the interest rates start to accumulate. Credit cards, for those who do not have one, tend to charge VERY HIGH interest rates, especially for someone who’s never had one before. If you’re eighteen years old and just graduated from boot camp, the introductory interest rate on your first credit card will likely be around 20%. Maybe more. For that interest rate, though, let’s do some quick math to find out what you could get yourself into.
Let’s say you get your credit card with a $3,000 limit. You run out and spend the $3,000 on shoes, a cheap motorcycle (we will save the BMWs for our first promotion), a watch, and a lot of beer, since you are new at the unit and Steve doesn’t trust you with his cash yet. You may be thinking: Why not spend the $3,000? It’s free money, right? Just swipe the card and get the stuff—that is what is important to you at the moment, and we are in the military, so of course we make snap decisions!
You are probably feeling confident about your ability to repay it. You have got that regular paycheck that your friends back home cannot count on. You joined the military and made it through boot camp, and you are far more accomplished already than some of them will ever be. So it is time to celebrate and reward yourself. Or so it would seem. So you buy your stuff, and charge it to the credit card.
Have you, for even one moment, thought about how long it will take to pay this all back?
If you haven’t, here are some basic numbers. With $3,000 in credit card debt, at this first-time cardholder interest rate of 20%, making a payment of $100 a month will result in you being in debt (just from these purchases alone) for 42 months. That’s three and a half years before you have paid off a week’s worth of spending. If you somehow got approved for a $5,000 credit limit, and got into that much debt, the same interest rate with the same monthly payment would take you 109 months to pay off. Your interest payments alone would be nearly $5,900…more than the $5000 you spent originally. Which, of course, you have to pay back as well. 109 months…that’s just a hair over nine years of living with credit card debt.
Okay, but we are smarter than that. We have our regular, dependable paychecks, right? Even if we lose track of our spending and rack up five grand in credit card debt, we can certainly make bigger payments than $100/month! Wait…we can, right?
It would seem so—after all, an E-1 with less than two years’ time in service makes a bit over $1,500 a month, and that certainly can cover $100/month in credit card payments. Maybe you could up your monthly payment to $200/month, and bam, you’re all paid off in only 33 months. $300/month payment, and it will only take you 20 months. Wait, though—that’s still almost two years to pay off a stupid credit card debt that you ran up early in your career. Think about something else, too—do you really want to burn $300 a month just to pay off some credit card debt? If you ever want to buy a car, you will have to make payments on that too, unless you had thousands of dollars laying around before you joined the military. Cell phones, gas, going home for the holidays, buying new clothes (unless you like hanging out in your uniform all weekend long), and a bunch of other expenses. You can probably name them all off the top of your head, but do you remember them when you use a credit card?
We will get to how to figure out all those expenses, and still leave room for debt repayment, in a later chapter. For now, though, the important thing is to remember that paying $300 a month seems easy compared to your regular salary, but when it comes down to it, it’s not always so simple. Expenses add up very quickly, and scraping together $300 just to fork over to a credit card company every month isn’t a fun task sometimes. One other thing to think about: What if you need to spend more? What if there’s an emergency? You still have to pay the credit card company. Don’t leave yourself without that little margin of safety that you have with that regular salary of yours, because if you tie yourself down to a monthly credit card payment that you absolutely, positively have to make, you may find yourself having a very tough time paying for things when it REALLY matters. Like when someone in your family needs help.
There is, of course, another way to avoid a nasty pattern of high debt. If you need to borrow money for something, say that car you’ve been thinking about, look for a reasonable interest rate on the loan. There are plenty of car loans available through USAA, for example, at a much, much lower rate, roughly around 3-4%, depending on your credit score. Over the course of five years or more of repaying that loan of however-many-thousands-of-dollars, you’ll find that your monthly payment with a low-interest loan is way lower than with a high-interest loan.
Here’s another interesting twist. We saw earlier that running up $5,000 in credit card debt at the 20% interest rate, then paying it off at $200/month (we’ll settle on that for our repayment plan) gets you out of debt in 33 months. At the end of those 33 months, though, you paid back your original $5,000, but you also paid over $1,500 in interest—basically money that you paid just for the “privilege” of having so much fun with the credit card in the first few days after you got it. With a different loan at only 3%, you can borrow more money, have the same payment plan, and pay a lot less interest. Say you want to borrow $10,000 for a car. If you can get an auto loan for that at 3% interest, it will take you 54 months to pay back—making the same $200 payment every month. It takes you more time to pay back, but with a low-interest loan, that’s not always a bad thing. Why? Three reasons. First, you paid much less interest over that time—about $700 rather than $1,500. You are saving money already. Second, you were able to borrow $10,000 rather than $5000, which, in this case, was a good thing, because you got to buy a car, rather than a cheap motorcycle with nowhere to put your workout supplements and your subwoofer. Finally, as was just said, you made a smarter spending decision. You thought about what car you wanted to buy, you hopefully figured out that it was a better long-term investment, and you found a loan with much better terms—which is usually the one with the lower interest rate.
There are some complications here, of course. Sometimes a slightly higher interest rate is okay, especially if a lender gives you a longer time to pay the loan back. If you borrow money to buy a house, you will pay that slightly higher interest rate in order to arrange a 30-year repayment schedule. If you want to get a lower rate, of course, you can sign up for a 15-year mortgage. You will save some money by doing this, but keep in mind that when you pay back the loan in only 15 years, you’ve got to shovel a lot more of your monthly salary toward that mortgage payment, whereas with the 30-year loan, you don’t have to pay as much per month.
There are a lot of different perspectives on what kind of auto loan, what kind of home loan, and what kind of Steve’s-beer-money loan is best for you. If you sit down with a mortgage broker someday to buy a house, or you go to a car dealership and discuss financing with the dealer, they’ll have plenty to say about what you should and should not do. Most lenders are fair and honest people who just want to help you make a big purchase—after all, it helps you buy the car/house/beer and it helps them too, because they make some money off your interest payments.
But watch out.
There are some lenders, commonly known as “predatory lenders”, whose goal is to make as much money as humanly possible off your borrowing—regardless of how much it hurts you financially. Some lenders will lend people money at outrageously high interest rates, knowing they will not be able to pay the loan back, and then use the law on their side to repossess the home or car that they made the loan on. This not only ruins the credit of the borrower, but sucks a lot of money out of their bank account, especially during those first few months or years when they are going broke trying to make really high interest payments. Oh, and they eventually lose the home or the car as well. The predatory lender, of course, gets the house/car back, and they can sell it again…perhaps to another unsuspecting borrower who did not do his loan repayment calculations. It does not take long to figure out what your monthly payment will be at a given interest rate—just hop online and Google “interest rate calculator”…there are a hundred sites that will do it for free. If the person you borrow money from doesn’t quote you numbers that are very similar to what you see online, something’s wrong. Moreover, if they are trying to sign you up for a higher interest rate than what you think you can qualify for, something is really wrong.
One common thing near military bases are “Lemon Lots.” In some cases, these are car lots where military personnel can sell their cars to one another. This usually works well, especially overseas, because service members PCS every couple years or so, and it’s almost impossible to take your beloved $1,200 Toyota Curren home to America with you. Often, these lots have decent cars on sale for very low prices. They are excellent places to find a good vehicle.
There are other lots, however, especially on or around stateside military bases, that should be avoided at all costs. Conveniently located either on the base or just outside the front gate, they appeal greatly to someone living on base. If you’ve checked into your first duty station and you are living in the barracks, maybe you have not made friends yet. You are dying to get off the base, but you do not have a car, since you just graduated from boot camp and MOS training. You do not have anyone who is willing to get up on a Saturday morning to drive you around to a real dealership looking for cars to buy…so you decide to walk off base. Ah ha, there’s a dealership just down the street. Better yet, there is one on the base itself—you don’t even have to walk outside the gate! Think, though…there may be a reason why a car dealer would post up on a military base. Maybe they know you have never bought a car, since you’re living on base and are more likely than not a little younger than average. One thing they certainly know is that you have got a regular paycheck and no matter what, they can get the loan repayment money from you. Another thing they know is that if you get stuck financially somehow and cannot pay the money back…they know exactly where to find you. When you go to one of these dealers, just be careful. Check the interest rates they are quoting you on a potential loan (also, check the car they are selling you! Try and bring someone who knows cars, if you don’t, and find out if it really is a “lemon” or not). Check everything. If in doubt, go to your base financial office and ask them to help you confirm the details of a car loan you may be about to take out. There are people on almost every military base at these offices who are willing and able to help you with this—use their help.
If ANYONE has a problem with you being careful, thorough, and diligent before borrowing money from them, they are NOT to be trusted. Turn around, walk away, and do your friends a favor—keep them away too.
This is not to say that every car dealer on or off every military base is a shady guy who is going to give you a 29% interest loan on a car with an odometer that he’s been rewinding Ferris Bueller-style for the past six hours. As mentioned earlier, there are plenty of honest car dealers out there, and most of them are trying to make a living while doing something they love—selling cars. Just make sure that you one you are dealing with is one of these people. Because if they are the other kind of person, someone looking to trap you in a loan you cannot pay off, they are scummy human beings trying to take advantage of the military, and they should be sent to Fort Leavenworth to fill sandbags for the rest of their lives. That’s a much cleaner version of what really should happen.
One more thing, before we move on to much happier subjects. Just suppose for example that you DO get into bad debt. You’re racking up interest fees and getting nowhere in your efforts to pay it off. Does it make sense to continue on the sad old track of paying your $200/month on a loan with 20% interest? Even though it may leave you room for other spending this particular month, remember that over the long run, you’re costing yourself a lot more money than if you just worked to eliminate that bad debt now. One thing you can do is this: Change your monthly budget, immediately if possible.
Throw every dollar you can toward paying down your high-interest debt.
Remember, if you pay off the principal (the original amount you borrowed) of high-interest debt sooner rather than later, you won’t have to pay any more interest. If you did rack up $5,000 in credit card debt and you’re paying $200/month interest, but you have some extra money laying around that you don’t need for emergencies, use it to pay off the credit card. If you have a couple hundred extra bucks left over at the end of the month that you haven’t spent on important things, use it to pay off the credit card. The sooner you reduce the amount you owe, the sooner you’ll be free of those high interest fees. If you can find someone to help you consolidate your credit card debt and re-finance everything at a lower interest rate (this is common), you’ll at least be free of some of the high interest rates you are paying, which will slow down the horrible debt-snowball that you got stuck with early on. Remember, it’s like going on BCP…you can either sit there in the training office and listen to the Sergeant Major yell, or you can live at the gym until you, too, can avoid the knife-hand melee.
This has been a tough chapter. If you’re reading this and you’ve just relived some familiar experiences, hopefully they will stay memories, forever in the past. If you’re thinking about borrowing money for something, just keep in mind the rules for being safe about it. As said, there is nothing inherently bad about debt—it does, after all, allow you to get important things like a car or a house that you might not be able to enjoy without getting a loan. Without loans, most people would never become homeowners, and a lot of people could never afford things like college. The ability to borrow in order to get something that helps you become happier, or more productive, or to take care of your family, is important—important enough that you should be responsible about how to do it, so that if you need to borrow again in the future, you will be able to. And sometimes, bad things happen to good people, like emergencies, and we spend more than we wanted to.
Just be careful about it. Think before you sign the dotted line on a loan. Every time.
Now, on to subjects that are a lot more fun, like making money.
Part Two: Saving Wisely, Blowin’ Money, and Everything In Between: Your Salary and What You Do With It
None of my rules of success will work unless you do. I’ve always figured out that there are 24 hours in a day. You sleep six hours and have 18 hours left. Now, I know there are some of you out there that say well, wait a minute. I sleep eight hours or nine hours. Well, then, just sleep faster, I would recommend.
Having looked at some of the fun ways to spend money (and to not spend money), it’s time to look at how to make money, particularly while you’re still in the military. For most of you, it appears pretty simple—work hard, do your job, and do it well. If you want to stay in for a 20+ year career, odds are fair that you can do it, and you will get paid your regular paycheck on the 1st and 15th days of two hundred and forty months…or more…in a row. That is four hundred and eighty paychecks you’ll get over the next twenty years — four hundred and eighty reminders that the U.S. government and the American public appreciates your service and will take care of you the way you take care of them. As most of you have probably experienced, you get raises every now and then. Sometimes, you will get more than one in the same year, depending on when you get promoted and when you shipped off to boot camp. Over time, you’ll make more and more money in the military, which is not just meant just to be a lucky show of gratitude from the government, but also a way for the military to keep up with other jobs that may be available to you. Being the hierarchy that it is, the U.S. military must offer competitive salaries to retain its personnel, particularly those who could go to another organization and make a lot more money.
As said in the beginning of this book, we obviously did not join the military for the sake of making money. In many cases, we do not stay in the military for the sake of making money either—we stay because we love serving our country and the pride we get from doing that job well is greater than any paycheck we could possibly earn in the civilian world—any paycheck on Main Street OR Wall Street. As you get a little older, though, you may find yourself married, perhaps with children and a home mortgage. Completely normal. Your friends from high school and college will too, someday. Military personnel do tend to get married at a younger age than civilians, but that is partly due to the financial security provided by those regular paychecks and benefits. As a service member, you may find yourself in this position of increased responsibility (kids, etc.) a lot sooner than your friends back home, and so those paychecks become a little more important—perhaps providing that extra incentive to stay in the military, regardless of how much you love it.
Whatever your reasons are, though, you joined for a good cause, and you deserve every penny you are paid in the military. It does not matter why you are staying in the military—whether it is because you cannot see yourself doing anything else, or you hate the idea of working in a corporate office, or you have a child with medical needs who requires free health care, or maybe you just cannot possibly handle a job that does not have you up and running at 0400 every day of the week. Some of you may fit more than one of these descriptions. Either way, you know that you signed up for a good reason—and you deserve your paycheck as much, if not more, than anyone else you know.
In order to better plan your financial future, then, you will want to know where that paycheck comes from. Unlike boot camp, it is not a few hundred dollars on a paper check that you receive every two weeks. It does come twice a month, but sometimes there is a lot more to it than that. Those of you who have not deployed: you may have heard of something called combat pay. It isn’t a TON of money, actually, about $250/month, plus another hundred or so per month for being in a hazardous duty occupation (this can range from deploying to Iraq, to working on a flight crew where your odds of dying in an aircraft accident are much higher). It does, however, augment what otherwise might not be an incredibly large paycheck (yes, it is acknowledged in this book that an E-3 makes a lot less money than an O-4, etc.). More importantly, though, when you deploy to a combat zone (whether or not you’re actually putting rounds downrange over there), your pay and benefits are entirely tax-free. This is huge—it means the normal 15% or so that the government takes back from your regular paycheck is no longer removed from your pay—instead, you keep it.
There is another aspect to combat pay—you’re getting paid while overseas, probably in an austere environment where there is little to nothing that you can possibly spend money on. A lot of service members may have families back home, but you personally do not have a lot of places to swipe a credit card while you are in Iraq. The DFAC (Dining FACility, known to some as Da Food Acquisition Center) does not charge you a dime for your food, and MREs are mercifully free of charge as well when you are deployed. If you have access to a PX somewhere, you know that there are only so many motivational t-shirts and NOXplode canisters you can stock up on before you run out of room in your sea bag. Your internet (if you even have it) is not always supportive of Amazon shopping habits, and your ability to get mail might be so constricted already that it is not even worth it to go looking for those Nikes online that you cannot even wear out in Iraq or Afghanistan anyway. With all that in mind, you are essentially making a lot more out on a deployment—between your extra salary and, of course, your extra saving. You may only be getting paid a little more, but when you watch your savings account accumulate dollars quickly, it feels like you’re getting paid a lot more.
Another special pay you may find yourself receiving sometime is per diem. This is a daily stipend meant to finance your expenses and meals, especially when you are travelling off base in an official capacity and are unable to spend your nights in a barracks (what a shame). This stipend, which can range from about three bucks a day up to maybe $56/day, is obviously enough to cover the costs of eating three meals a day, plus your “incidental” expenses like that toothbrush you forgot to pack. If you are spending more than just a couple of days in this traveling capacity, you can certainly go buy a decent meal three times a day, but if you’re inclined to save a little money, you can always go down to a local Walgreen’s, if one is available, and buy up some peanut butter and jelly sandwich materials. It won’t be as nice as eating out, or even your average chow hall meal, but you’ll save some extra money—money that can provide a nice little boost to your monthly salary.
Another allowance you get, if you are ranked high enough and/or have a family, is BAH—Base Allowance Housing. BAH is typically paid out based on your zip code, so if you live in 29 Palms, California, where a nice house rents for $900/month, you won’t receive as much as if you live in Miramar, where the apartments nearby cost almost twice as much. Those service members who are savings-inclined, especially ones without families, have another savings opportunity here. Try and live with other service members (hopefully friends of yours) in an apartment or house where you are splitting the rent and thus paying less. Like the PB&J options, it’s not always as luxurious as having your own apartment, but you can save a little more money.
One more source of extra pay is COLA (Cost of Living Allowance) or OCOLA, if you live overseas. This pay compensates you for living in what are considered high-cost areas, such as New York City, where your base military salary will not get you as far as when you are in Cherry Point, NC. Additionally, your OCOLA, if you live overseas, will pad your income and allow you to handle expenses incurred by the fact that you live so far away from home. Think about it—if you want to go home for the holidays and your parents live in, say, Chicago, it’s a simple drive or at most a three-hour flight for anyone living in the U.S. To fly from Okinawa over to Chicago, though, is fifteen hours at best, not counting a layover in Tokyo. Needless to say, your plane ticket, if you buy one, will cost you a lot more. Now, this is not to say that you should live out a two-year tour overseas without going home at all. There are plenty of reasons to go home, and you should absolutely visit your family as much as possible, especially if you’re single and stationed in Japan, Germany, or Timbuktu. However, you can easily do so for much less if you look to take advantage of the times during which you may be sent (temporarily) back to CONUS. If there is a stateside exercise taking place and you’re assigned to participate, you should have the opportunity to take a quick flight home to see the folks after the exercise is over, and sometimes even before. Obviously, your plane ticket back to America for the exercise is paid for. Why not capitalize on this and just buy a short-distance plane ticket for $300, instead of a $1,200 trip from your overseas duty station? The key is to simply wait until you have that opportunity to come stateside. It may not present itself, in which case you should of course spend the money and prioritize your family over your savings. In a really tough case, you may have a personal emergency or a death of a friend or family member, and there is not much you can do about that. However, let’s say it is April and you have some leave days saved up, and you are just dying to get home and re-discover your mother-in-law’s Italian cuisine. You can either buy the plane ticket for early May and get home to that lasagna, or you can sit tight and wait to hopefully participate in that mid-June exercise taking place in the Mojave Desert. If you buy the May ticket, you’re spending a lot of money, although you do get the lasagna earlier (admittedly, this is a big deal when you’re stationed on a tiny air base with a 7-day shoppette and little else). If you wait until June, you could save all but about $300 of that $1,200 ticket, and you’re only waiting an extra six weeks. Of course, there’s the chance that you won’t get to go on that June exercise…and then what? Which do you choose? It’s a hard choice, but one that can provide some interesting decision making possibilities.
Another way to get some extra money added to your overall salary, at least at the end of your career (if you’re on active duty) is to sell back your leave balance. This works especially well for those who already get BAH. If you have up to 60 days of unused leave accrued over your past 4+ years of service, you can simply sell it back to the government and get paid for however many days you “gave back.” This can be a very large amount of money, amounting essentially to two months’ pay. Quite a nice little kiss goodbye from Uncle Sam, right there. If you don’t get BAH, you can always opt to go on “terminal leave,” where you are essentially free from all duties for your last two weeks, month, or however long you’ve got saved up. When you go on terminal leave, you receive BAH for that amount of time—therefore making it a pretty fairly balanced deal. It’s nice to get that money during the last portion of your service contract, especially when you’ve never received it before. Of course, you still get paid your normal salary for that time as well. If you already get BAH, though, it makes much more financial sense to simply serve out the remainder of your contract. Some service members opt to go on terminal leave to “take some time off” and just get away from the military as fast as possible. If your immediate supervisor is that awful, it may be understandable. However, you’re probably going to have much, much more time off after you hit your EAS. What’s the rush? Think about working for those last two months, or however much time you have saved up in leave, and then get paid extra for that time after you get out. It’s a really nice little bonus, and it’s also money you’re probably going to want to have in the bank—especially when you suddenly stop getting those biweekly paychecks.
All that said, there are a lot of other ways that you get paid in the military. Not all of this extra pay is available to everyone, particularly since service members are all different ranks and live in different areas. If you don’t find yourself in a situation where you are getting BAH, per diem, combat pay, OCOLA, or any other allowances, you’ll have to focus more on the basics of saving in order to accrue more personal wealth. If you are in one or more of these situations, the challenge is on you—try to resist the obvious temptation to enjoy a cushier lifestyle, and see where you can save a couple hundred bucks. It will add up over time, and provide you with ways to get a lot wealthier than you already are.
At last, we get to the really fun parts of the book: What to do with all your money. It’s an age-old dilemma that has confused, frightened, tempted, and completely flustered many millions of humans for the past four thousand years or so. It is a question that has made thousands of people millions of dollars and millions of people thousands of dollars. And a few people billions of dollars, but we’ll get to that later. For now, we will focus on the key themes that can help us come up with the final answer to how we reach our personal financial goals and finally get the keys to that BMW, maybe the four-bedroom house with the ocean view, and…who knows what else?
To start, there are a couple key terms that you probably already know: Risk and Return. They are loosely defined, in the financial sense, as follows:
Risk: The danger you face of losing some or all of your money, either temporarily or permanently.
Return: The possible monetary gain you can reap from your financial activities—ALL of your financial activities.
There are a lot of other definitions of Risk and Return, both in and out of the financial world, but the above definitions basically cover what we are talking about. A couple of practical examples in the non-financial sense would be the risk you took if/when you joined the military against your parents’ will—you risked losing their approval forever, and perhaps never again having a place to call home. The return, of course, is the happiness you get from being in the military, serving your country, going on a deployment, visiting Bangkok, etc., etc. In the end, you weighed your risks, whatever they were, against your potential returns, and decided that the returns outweighed the risks.
You probably remember an ORM (Operational Risk Management) class, or maybe seventeen of them, that went over some of the ORM rules, such as “accept no unnecessary risk” and “only accept a risk when the benefits outweigh the costs.” Without getting into a detailed and mind-numbingly dry discussion of earplugs and fire drill procedures, it’s important to think about how those relate to your personal finances. When managing your money, you do not always want to take on a lot of unnecessary risks, at least not when the potential returns don’t outweigh those risks. With that said:
If you want a high return, you DO have to take some “unnecessary” risk.
Nobody will ever force you to take risks with your money, like investing it in the stock market or playing blackjack at the casino. In that sense, risk is not necessary, because you will always have the option of just saving it up in a savings account and not touching it. That’s pretty un-risky. On the other hand, your return will be pretty low…just a little bit of interest here and there. You COULD put all your money into the stock market and hope for the best. Over the long run, it’s one of the best ways to build up your wealth, especially when you (hopefully) pick the right stocks and the price of your shares goes up over time, in addition to dividends that companies pay you just for holding their stocks. Investing in stocks will…
…OVER THE LONG RUN…
…likely provide you with a significantly higher return than what you stand to gain from socking your money away in a savings account. With the higher return, though, comes the higher risk. It’s easy for a financial advisor, or a so-called investing “expert” to get on TV and tell you how wonderful the stock market is, and how you can’t possibly afford to miss out on a big new investing opportunity. It’s not so easy for them to explain to you why the stock market is suddenly crashing, and why that $2,000 that you brought out of Las Vegas and invested in MiramarLemonLots.Com stock has now decreased in value to only $500…leaving you wishing you had spent that other $1,500 on the Rolex. There is a LOT of risk when you invest your money, especially when you do not have a lot of expertise in the area. However, there are a lot of ways to mitigate that risk—keeping you invested in stocks, but not horribly exposed to Miramar Lemon Lots’ price swings. Your potential return can be somewhat limited, but your risk is more limited as well.
As was discussed earlier in the book, there are a ton of other things to do with your money. Most involve some kind of risk (of losing your money), and some involve some kind of return, both short-term and long-term. Over the next few chapters, we will look at which provide the most risk, the most return, and how to make the most out of each and every opportunity.
Man, that’s all we ever do is talk shit: ‘We need to get fine bitches and fat rides’…‘No, what we need to do it put our money in savings bonds’…’No, what we need to do is put our songs on JLB’. Man, shut the f-ck up. All of us never do shit about nothin’ and we’re still broke as f-ck and living at home with our moms.
-Eminem, 8 Mile
When you get money in the military, there’s five things you can do with it. There may be others, but they probably fall into one of the following categories. These are:
- Blowing Money
No, number 5 has nothing to do with cocaine. We are in the military. It is blowing money, otherwise defined as spending, without any possibility of deriving real value from what you bought. Remember The Dark Knight, when the Joker burns his half of the mob’s cash? Very similar. It’s a little difficult to define this one, as well as almost every other category, because oftentimes, spending money on something can be construed as investing. Speculating can also feel like investing too. We’ll work on deciding the difference, though. For now, there’s a spectrum of potential return that can be realized from each activity. See below:
On the left, there’s investing, which when you do it intelligently can provide a pretty nice return over time—in most cases the best way to achieve your personal financial goals. Investing is NOT just limited to stocks. In many cases, it can mean a home that you rent out to others, farmland, or anything else that you spend money on with a reasonable expectation of getting a financial return somehow.
Moving to the right, there is saving, which is much less risky, but provides a lower return over time than investing. Think: savings accounts. Certificates of deposit. Cigar boxes of cash under your pillow.
Then there’s spending. We all know about this one. It’s what you do every day. Whether you swiped your credit card today or not, you probably spent money. Unless you don’t have a cellphone, a car, or any personal living expenses whatsoever, you spent money today. Your $100 cell phone bill that you paid at the beginning of the month? That’s spread out over 30 days. $3.33 per day. Your $800 car insurance bill every six months—that’s about $4.50 a day that you spend to protect yourself against repair expenses, crash liabilities, etc. And then there’s a ton of other things, which will be listed out in a later chapter.
Moving on, there’s speculating. This a little hard to grasp too, but it is basically anything like gambling at a casino. If you play the lottery, or buy a penny stock that has a tiny chance of going way up in value, you are speculating. You’re taking on a big risk of losing money in the hopes of making a big return. You do have the chance to make a lot of money here, but the odds are stacked against you, and in the long run, you usually lose.
Last, but not least, we have blowing money, spending on things that aren’t even remotely important to us. Unfortunately, many people in the military put way too much of their money into this category, as well as the Spending category, and not enough in the Investing/Saving section. Spending is understandable in most cases, especially when you have a family or other expenses that are not negotiable. Blowing money, on the other hand, is tough to understand, particularly after you’ve already done it.
Why do we do this, especially in the military? After all, we’re taught to “work smarter, not harder,” in other words, to not expend unnecessary effort on things when there’s an easier, faster, smarter way to do them. Why would we spend unnecessary money on stuff we have absolutely no real need for? Why does a sergeant buy a $400 round for an entire bar, when he only knows 4-5 people in the place? Why does ANYBODY buy a $200 HDMI cord for their TV?
There are two main reasons for this. One, people in the military have stressful lives, and blowing money feels good. It’s nice to spend money on random stuff that we don’t need, because it’s a really nice moment when you can completely let go of all of your discipline that you have to live with every day. Just as nobody is standing over you making you save part of your salary every month, nobody is standing over you telling you NOT to spend that money on…whatever it is you feel you need or want at the moment.
Two, when making spending decisions, we often THINK we need things that we really don’t. To a customer buying something that he has no need for, but thinks he does need, that purchase is simply spending. It might even be investing, if he really thinks he has the potential to achieve a return. In the end, though, it was “blowing money” not because it was an investment opportunity that went bad, but because there was never, ever any chance of getting a return on that spending. It is tough to decide what has the potential for return and what does not, but odds are excellent that if you trust your gut instincts, you will do a lot better than someone who falls for a lot of scams. It’s like shopping at a knockoff flea market overseas. If you have the opportunity to spend money on something that looks really fancy but is priced cheaply, it is probably because it really IS cheap.
To dive deeper into that, it’s time to look at some true stories, shared by military service members, about money that they blew on stuff they did not need.
What is the reason? Soon the why and the reason are gone and all that matters is the feeling. This is the nature of the universe. We struggle against it, we fight to deny it; but it is of course a lie. Beneath our poised appearance…we are completely out of control.
-The Merovingian, The Matrix Reloaded
I was just out of boot camp, about to go to MCT (Marine Combat Training) and had received 13 weeks’ pay for going through boot camp. I went to Best Buy and wanted to get an HDMI cord so I could watch movies on my TV, streamed from my laptop. The salesman told me the best cord would be this one that was on sale for $200…it would provide, by far, the best picture resolution. So I bought it.
Over the past few years, I’ve bought about $350 worth of hair extensions.
I’ve bought about 100 pairs of Air Jordans in my life…I’d say the average pair costs around $180. Sometimes I re-sell them for more than I bought them for, but most of them stay in my closet. I’d say about 18 grand total, on basketball shoes.
I bought an $800 watch…and don’t know where it is. I’m not looking for it, either.
Since getting my video game console, I’ve spent $300 on colorful skins…for the characters in my games.
I traveled overseas with two girls who bought knockoff purses for $300 apiece. They were worth five bucks each, and I told them so, but they insisted on paying three hundred for them.
And on, and on, and on. These are all true stories, shared by military service members of different age, gender, and ethnicity. There’s no end to it. Military service members blow money on stuff. The reasons why they do it, though, are different, and that is what is worth exploring the most. To start, let us look at the HDMI cord. A Marine reservist went and bought it for $200, which is about $194 more than you can get it for at Walmart. Now put yourself in his shoes. Your stated reason for this purchase is that you want a better picture resolution, but this could probably be achieved by spending just a few more dollars, rather than an extra $194. Do you really intend to spend $200? Probably not. Would you go to another store (and endure that agonizing two-hour delay!) if it meant saving $100, $150, or $175? Probably. But here’s a question…do you really KNOW if there’s another store out there with a cheaper cord? More importantly, do you KNOW that you’ll get a nearly-perfect picture resolution with a six-dollar HDMI cord?
How much do you really care?
The amount of care you put into these kinds of purchases can absolutely make or break your ability to save money. Many service members, being naturally impulsive, want to make that snap decision on their feet, without doing all the boring, mind-numbing research that goes into getting online and doing a little simple market research. When we see fancy things, the most important thing to us is simply making the decision, not actually doing background work. With something as simple as an HDMI cord, the process is even easier—after all, the worst case is that we over-spend by a couple hundred bucks. There are two problems with this. First, with something like an HDMI cord, or something else that can be bought cheaply, overspending by a lot means you are basically paying over 3000% more than you should. When you’re “only” wasting $194, that kind of overpayment might not sting as much, but it is the same principal as buying a car that’s worth $5,000…but paying $150,000 for it. Even if you only paid $12 for that $6 HDMI cord, you still paid double what you should have. Would you feel comfortable buying that $5,000 car for ten grand? Probably not, especially since you now know how long it may take you to pay off the loan on that thing.
It is not hard, obviously, to cope with paying an extra six bucks for a something you really want, like an HDMI cord, particularly if you’re stuck in the barracks all weekend and you just want to watch some movies on the big screen. If you’re on base and all you want is to pop in Transformers 3, hunting around online or in different parts of the base PX for the best deal on a lousy cable is one of the last things you want to think about, especially when your savings might only amount to six bucks. If this situation, or anything similar to it pops up in the future, though, try a little trick and see where it leads you.
Take the extra five minutes, look around, and see if you can save a few dollars.
For an HDMI cord, or a case of beer, or a roast beef sandwich, there’s usually the most convenient place to buy something. It may be the cheapest, but it may not be. When it is not, try and find a cheaper place to get something small. It won’t add up to much savings, but it is good practice. When it is time to buy something big, you will be a little more used to hunting for a bargain, and it will pay off. If you can overcome your natural bias for action and get accustomed to considering your purchasing possibilities for just a few minutes on cheap items, you’ll be able to get past the natural frustration that you may encounter when looking for a much more expensive item. There are so many people, both in and out of the military, who go out to buy a car and snap up the first “good deal” that they see. Buying a car is often a painstaking process, and there is no guarantee that you will save a thousand dollars by browsing the next dealership down the block. It’s easy to take a deal in front of you, bury your head in the sand, and just assume you would not have found anything better at another dealership. The problem, of course, is that odds are high that there are better deals out there, and if you can just fight your impatience for a few hours, or a few days at worst, you will probably end up saving a lot of money…and that is how you end up richer in the long run.
In addition to simply building up some better spending habits, consider this: When packing your rucksack (or ILBE, or ALICE pack, or whatever you called it when you went to boot camp) to go out to the field, you get a mandatory packing list. Sleeping system, canteens, MREs, flak jacket, etc. etc. It’s easy to say to yourself: Let’s just bring that Ka-bar…even though there’s no way in hell you’re going to need it out there. Remember what they say…ounces make pounds. The more random stuff you bring that you do not need, the more you are going to feel it. Ten pounds may not seem like a big deal when you are packing a bag in your barracks and you are not tired or hungry, but lugging it around for two weeks is another issue altogether. Before long, you are cursing yourself for being careless with something that seemed so trivial…because at the time, it did not seem to matter very much.
It is no different with spending, or saving, small amounts of money. Remember, at all times, that it adds up. Six bucks may not seem like a big deal when you just got paid a thousand on your last paycheck, but that extra spending accumulates. Before you know it, you just blew an extra ten, twenty, or a hundred and ninety-four dollars…which could have been your car payment, saving, or investing money for that month.
The HDMI cord is a pretty unique case of blowing money, but the other cases are important too. The hair extensions and the video game character skins are other examples of spending too much money on things you do not need, but in those cases, they didn’t come from buying just one thing, but instead buying a lot of the same thing. It is like spending perhaps a bit too much money on coffee, for those who spend $30/day on it, or going to Las Vegas every single weekend. There is nothing wrong with coffee—to suggest otherwise would be sacrilegious in the military. Las Vegas is an incredibly awesome experience as well. But to spend money on each just because you can means you should probably stop and think for at least one moment: First, will you ALWAYS be able to spend this much? If the answer is yes, you’re probably rich enough to not need this book, but if the answer is no, which it probably is when you are in the military, you should then ask yourself…how much are you spending on stuff you do not actually need, and how much are you saving for something you WILL need some day?
The case of the basketball shoes is a little different. Unless you are someone who actually changes shoes 100 times a day, and there are a few of you out there, it is easy to lump this in with blowing money. It is an extreme case of the hair extensions and video game character skins…unless you look at the re-selling of some of the shoes. If you can buy shoes for $180 and re-sell them somehow for a lot more, it goes from blowing money to becoming a real investment…and a real good one too. Whether or not you are able to re-sell shoes, or anything else you buy and re-sell, and actually make a profit, does not matter so much as what your intentions were. The fact that you’ve got more in mind than just spending money because you have it means you’re thinking the right way—you’re thinking about making money, not just blowing it.
The last case listed at the beginning of the chapter, the one about the knockoff purses, is in bold because it is by far the most extreme case of blowing money. In this case, two ladies decided to buy things BECAUSE they were expensive. There was no other reason for it, except that they felt that by paying more for something that at least looked fancy, they were making it actually more valuable. More valuable, perhaps, if they chose to go home and brag about how they paid $300 for their purses. Maybe that’s worth bragging over to some of your friends, but only for about two minutes.
A year after you blow your own money buying something worthless, nobody cares how much money you paid for it.
If you feel like paying more money for something makes it more valuable in YOUR OWN eyes, you need to reconsider how you attach value to something. Making a sacrifice, especially a financial sacrifice, to accomplish something like buying a five-dollar purse is stupid.
Our lives in the military, and particularly our financial resources, are too precious to waste on being stupid.
There is a time for spending money, even blowing money, just because it feels good, but it should be for something that you can at least get a little bit of enjoyment from. Spending extra just to trick yourself into thinking you are richer will, in the end, just make you poorer. Your friends will get a good laugh out of what you do, but you will not. If you’re really so concerned with how much money people think you spend, just tell them you spent more than you really did. Then take your money and try to make something out of it. There’s plenty of ways to lose your money, but some of these ways at least give you a chance to make money too.
Don’t go chasin’ waterfalls
Please stick to the rivers and the lakes that you’re used to
I know that you’re gonna have it your way or nothing at all
But I think you’re moving too fast
Speculating is, for most of you, the most exciting thing you can possibly find to do with you money. It’s also usually the most dangerous. If you do it with small dollar-amounts, it may not seem like a big deal, and it usually isn’t, but like in the case of blowing money, it adds up, and you usually lose. There are some cases, as usual, where speculating can be enormously profitable, and in a non-financial sense, speculation has often been the key to most of mankind’s success over the course of history. How, then, do we define speculation? One good definition in the financial world is the following:
Speculation is spending money and taking a chance on something in the hopes of achieving a financial return, but without much solid logic behind your decision-making. Speculation relies more on hope and excitement than common sense and careful thought.
Sounds risky, right? In most cases, yes, it is. However, as said above, speculation has led to great things over the past five thousand years or so, both in and out of the financial world. Without speculation, Europeans would probably never have discovered America. Computers might not have been invented. Rutgers and Princeton may never have started playing some rougher version of soccer in 1869 that turned into a wildly popular rugby-like game with end zones, goalposts, and “touchdowns” a few years later. If Charlie Bucket hadn’t spent so much of his money on Wonka Bars, he would never have made it into the Wonka’s Chocolate Factory and then inherited the whole company a few hours later.
Unless Hershey’s or Reese’s starts putting golden tickets in candy bars, though, we’ll have to consider more real-life possibilities. If you ever buy a lottery ticket, you are speculating. If you gamble at a casino, you’re speculating as well. If you buy stocks without doing any research into the company whose stock you’re buying, you are speculating. If you do almost ANYTHING with your money just because it looks snazzy, exciting and other people are doing it, and because you think you can turn a quick buck, you are probably speculating.
Again, though, speculating isn’t always bad. First, millions and billions of dollars have been made by speculators who got lucky. They saw an exciting opportunity, rolled the dice (literally or figuratively), and struck gold. Secondly, speculating, despite usually being a losing proposition, does at least provide a chance for making money, or achieving success of some sort. There, at least, lies an advantage over simply blowing money.
The problem with speculation, though, is the temptation it presents. Unlike blowing money, where you usually know what you are getting (like that $5 purse or the slightly-better HDMI cord), speculating is not a certain thing. You can lose your money, but as mentioned, there is always the chance for a big gain. The chance to score big on a bet that usually loses is very tempting and provides a natural rush of excitement that is literally a chemical stimulus to the brain. It’s almost like adrenaline. When you go on a deployment and get really hyped up about being overseas on a combat zone, you get used to it. It becomes natural that you should be excited, nervous, scared out of your mind, whatever the feeling may be—in fact, it becomes natural to the point where some military personnel start to depend on it. If you have ever come back from a deployment and suddenly felt an extremely deflated sensation and/or depression, you know what this is all about. It sucks. It’s horrible. It may be nice to go back home for a day or a week or a month, but a lot of veterans find themselves just wanting to deploy again. Deploying to a combat zone, of course, is usually the best and most productive thing you can do in the military, and it is the ultimate fulfillment of why we joined the armed forces. It is absolutely, positively a better thing to do than putting all your roulette money on black or investing thousands in stock shares that look like they are going to continue rising in value forever. The big similarity, though, is that it provides that rush of excitement, emotion, thrill that can get addictive…which is why financial speculation, once you get used to it, is hard to turn away from.
Going a little deeper into financial speculation, it is important to consider some past examples and how you can avoid situations like them. One example is “Tulip Mania.” It took place in Holland in the 1600’s. Tulip flower bulbs, which had been recently introduced to the Dutch, were considered very beautiful and pretty rare. As more people took notice of how pretty they were, they began bidding up the price until tulips came to be considered fairly valuable, like iPhone 6s and BMWs with under 30,000 miles. Up to this point, Tulip Mania was what economics gurus call a case of supply and demand—there was a lot of demand for something in low supply, so naturally it was a seller’s market. Where it got crazy, though, was when people noticed that the price was going up, and up, and up…
…and so they figured that since the price kept going up, it would CONTINUE to go up.
At this point, very few people cared how pretty the little tulip flower bulbs were. They just wanted to buy them because they assumed the price would keep going up. People in Holland got so excited that eventually some were willing to trade their house for a lousy tulip bulb. It’s hard to believe, since none of us would trade our house for a tulip (although if you count barracks rooms, some might take that deal).
The problem was, eventually these tulips got too expensive. AT SOME POINT, people decided they didn’t want to trade their house, their bag of gold, or their Porsche-like horse carriage for a tulip. Probably because they were intelligent enough to realize they had more use for the truly valuable item, and that a tulip was just a nice-looking object. This is where speculation, which so many people in Amsterdam had engaged in, went sour. One person noticed that their tulip couldn’t be traded for the Porsche of horse carriages, so they agreed to trade it for a less tricked-out horse carriage. With this happening enough times, people soon noticed that the tulips were “trading at” a lower value, so they got nervous and decided to dump their tulips on the market for something less. Maybe just a bag of silver. With enough people trying to sell their tulips, which were probably starting to wilt, the market got saturated with them. Sellers panicked, especially those who had bought a tulip with their house or their gold, and the price went lower and lower as everyone tried to undercut the other guy’s price. Eventually, tulips were selling for about as much as the dandelions growing outside the barracks.
Who won here, and who lost? A few people definitely came out on top, especially those who held onto their tulips for a while and sold them while the market was at a peak. Others, who bought them for a high price and then sold them for a slightly higher price, made some money. They went with what’s called the “Bigger Idiot” theory, which says that you can make a dumb purchase and still profit from it…
…there is a “bigger idiot” out there who’s going to pay a higher price for whatever you just bought. It’s a crafty idea, and when things are steadily going up in value, it seems fool-proof…except that it depends on there being someone who is a bigger fool. Eventually, though, people get wise, or sanity hits them over the head and they realize it is not worth buying something that has no real value behind it. When that happens, everyone who got excited and bought tulips, or anything else when it was really high in value, gets burned. What is tough about speculation here is that most people get excited when things are getting more expensive. They see the price going up, so news spreads like wildfire that there’s some hot new item that can make you rich. As more people buy in, the price shoots up even faster—until the bubble bursts. Then news spreads like wildfire again…the bad news, that is. A lot of people get scared and sell out, usually at a loss, because the price is plummeting, pushing prices down until there’s just a few poor folks left standing around with wilting tulip bulbs…no house, no Porsche, nothing but a really expensive lesson about speculation and why it is bad for almost everyone.
It is easy to look back and chuckle at those silly tulip-buyers who lost everything. It is not so easy to understand the situation, though, when you are caught up in it. Consider one more example—the “dot-com bubble” of the late 1990’s. Some of you may remember it, and a few of you may have been part of it. In the mid-90’s, the Internet got really popular, and companies began creating webpages to sell their products and advertise their services. One company, Garden.com, started selling gardening products online in 1995. Their stock began trading at $12 per share in 1999, and even though the company was losing millions of dollars, it went up to $20/share later that year. Why was this stock so exciting to investors? One, because the company had a nice website with lots of flowers on it (and you could buy tulips at cheap prices, too), and so it looked like a good business to people who weren’t used to seeing companies on the internet. Because they had little to no experience with this new, flashy stuff, investors were excited in what the future could hold. The Internet was this crazy phenomenon—the way to the future. Surely, it would make a lot of money!
It would, but not for a while. Everyone who pays $100/month for their Android or iPhone knows the Internet is very profitable to some companies, but to Garden.com, it wasn’t. But nobody cared that it was losing money—it had a flashy website, after all. What was more significant, though, was that everyone else was investing in Internet stocks as well. Since everyone else was doing it…it must have been a good idea, or so a lot of people thought. That is, until some people stopped buying Dot-Com Internet stocks like Garden.com, Pets.com, Webvan.com, DrKoop.com, and a bunch of other stocks of companies that didn’t actually produce a profit. Then, just like with the tulips, the Internet stock-bubble burst, and lots of people started to panic. Prices plunged, and a ton of so-called “investors” who had actually quit their jobs so they could sit at their computers at home and trade Internet stocks with their life savings got completely wiped out. Garden.com went down to nine cents a share. The dot-com “investors” paid the price, like the tulip traders, for speculating. They saw what looked like a quick, easy way to make a lot of money, but had no real logic behind their decision, except to say that everyone else was doing it. According to their laws of physics, “What Goes Up, Must Keep Going Up.”
If you are thinking about investing in something, but you are not sure if it’s speculating, there is a simple rule to figure it out. What is actually holding up the value of what you want to invest in? What Goes Up can, in the long run, Continue To Go Up, but only if there’s real value behind it. If you want to buy a house near a military base and you know you can rent it out to other military personnel and make enough money to pay your mortgage and all the other expenses that go into owning a home, that would certainly qualify as an investment. Your return may not be all that high, especially if you pay a lot in maintenance and insurance costs, but you’ve got that fundamental rent income coming in, and that holds up the value of your house to you. Even if nobody ever buys the house from you, you have that income coming in, and that’s why your house is worth something to you, no matter how much, or HOW LITTLE someone else ever offers you for it.
Speculation, on the other hand, can feel like “investing”, except for a couple small details that make a world of difference. If you are “investing” in something just because other people are doing it, you may be a speculator. Even worse, if you’re “investing” in something just because the price of that thing has been going up and up and up, you’re building your fantastic financial achievement goals on nothing but air. The only thing holding up your “investment” is a piece of paper that shows a chart with an arrow pointing upwards, and odds are incredibly high that one day, someone is going to notice that that chart, and the so-called investment it is showing, is not worth the paper it is printed on. That one person is going to become ten people, and then a thousand people, and some day, probably nobody will want to buy whatever that speculation was. That’s when your “investment” crashes in value, and you lose a lot of money.
Don’t be that guy who loses everything. You may see some exciting opportunities where a few people have made a lot of money, whether it be in real estate, or the stock market, or tulip bulbs. One commercial playing on the TV in the Miramar chow hall in 2012-13, a commercial that a lot of Marines saw every day eating lunch, recommended buying gold as an investment, just in case the economy went bad again and you needed a secure substitute for cash and stocks. This argument had a little logic behind it—after all, if something like a global nuclear war ever broke out, it would be good to have some gold in your pockets so you could trade for food, shelter, or shotgun shells. The other part of the commercial, though, appealed to speculators because it just showed a rough, jagged chart of how the price of gold had gone up steadily over the past couple years, from about $1,000 an ounce all the way to about $1,700 an ounce. It basically told people, military personnel in this case, that the price of something was going up, and because of that, it would probably keep going up. It didn’t specifically say that gold would keep getting more expensive, but showing a chart of how the price has gone up is a pretty obvious way of playing on your imagination.
Two years after that commercial was on, though, the price of gold has gone down (at the time of this writing) to less than $1,200 per ounce. It is uncertain how many Marines watched TV in that chow hall, but hopefully none of them thought about “investing” a month’s salary OR MORE in something just because a TV commercial showed a fancy chart with a price arrow pointing up. Hopefully you won’t either.
There are a million other examples of speculation out there, but the keys to avoiding it, for the most part, are simple. Think about what you are doing and whether you are doing it because everyone else is too. Consider what is holding up the value of your investment, and based on that, decide whether it’s even a real investment at all. If you cannot come up with clear answers to those questions, you may be speculating with your money, and taking a big risk that you will lose a lot of it.
A final note: As said at the start of the chapter, not all speculation is bad. Once in a while, after a long field exercise (or deployment), going to a casino to gamble with a couple hundred bucks can be a big stress-reliever, not to mention a neat little adrenaline boost, provided you can control it. Buying stock in a small gadget company that doesn’t look so snazzy, but might invent a better mouse trap next year (making its stock go up 100x in value), may perhaps pay off for you, if you’re lucky. Taking chances on long shots, either in Las Vegas, the stock market, tulips, Wonka chocolate bars, whatever it is, can have tremendous payouts. It is exciting, too, and that is why it is okay to speculate…a little bit. Just don’t do it too much, too often, or with too much of your money, because a lot of it you’re going to want to put toward savings and wiser investments…and the rest, you’ll want to actually spend.
That’s my crime? Commingling? Guilty. My alimony number one comes from money commingled with my beer money. My refinanced car commingled with the short-term loan to keep the second mortgage paid off, commingled with my alimony number three, commingled with every damn dime I’ve got tied up in my Mt. Olympus property. My whole life’s commingled.
-Harrison Ford, Hollywood Homicide
Do you remember hearing about shapes in 1st Grade, where you learned that a square is a rectangle, but a rectangle isn’t always a square? That’s kind of how spending and blowing money works too. Blowing money is always spending, but spending is very rarely actually blowing money. Most of the time, when you spend money on an HDMI cord, hair extensions, a purse, Air Jordans, oh hell, even video game character skins, you’re just paying out a reasonable sum of money for something that makes you happy, entertained, excited, or maybe just keeps the heat on in the winter. So, without further ado:
Spending is paying an amount of money, usually a reasonable amount, for something that you have some kind of use for.
Obviously, there is overspending on one thing, like when someone buys a car for $10,000 because they were too lazy or just didn’t care enough to go down the street and poke around looking for the same car priced at $9,000. There is, as was discussed pretty thoroughly, blowing money, which is different from overspending because you are paying out a ridiculous amount of money for something like a $200 HDMI cord, OR you are paying out a small amount of money over and over for a ridiculous number of things, like video game character skins.
Going back to overspending, though—there’s another type of overspending, other than just paying too much for one particular item. It’s a less extreme example of the video game character skins, where a military reservist paid a small amount of money for an insane number of things. Overspending, in this case, would be buying, say, ten of those skins, when someone really only “needs” two or three (the blowing money example, of course, involved literally hundreds of character skins). If they buy a few more than they really need to make the game interesting, is it blowing money? It’s hard to say…they may only be wasting a few dollars, so it’s likely that they just had fuzzy judgment and spent a little too much. In that case, it’s overspending.
This kind of overspending, buying too much of something, is pretty common. It is also fairly natural in the military, since we like to plan ahead and be prepared. Remember that temptation to take extra stuff in your pack before going on the field exercise? For military personnel, it is good to know that we have everything we need to keep our stomachs full and our rifles firing, but there can be the temptation to make yourself too comfortable—taking on that extra weight just to make life more pleasant, when it is really not necessary. That is also the essence of overspending. It’s easy to spend just a few extra bucks on stuff, knowing we probably won’t ever need it, but in turn giving ourselves that comfortable feeling: Ah, I’m so glad I have these extra seven party size bags of Cheetos…just in case it’s 2 A.M. and I’m too lazy to run to the snack machine down the hall…
Again, the issue with this, as with the careless over-spending on one particular item, is that it adds up. Eventually, you get to the point where you’ve spent all your spending money for the month, and you do not have enough left over to get that case of beer that would take your hum-drum Call of Duty evening in the barracks from three out of ten up to at least a five. This overspending can happen with video game character skins, and it can happen with Cheetos. It can also happen with your personal monthly budget. If you have ever sat through a military-sponsored personal finance workshop, you probably remember getting a worksheet (literally…it looks like a homework assignment) that has your total monthly salary at the top, and then, line-by-line, every expense you could possibly expect to have in a month, listed after that. It is a good idea to do this, except that they don’t really encourage you to figure out what you can afford and what you cannot afford. The nice thing is that it really isn’t difficult. Simply total up how much you make every month, then start deducting your monthly expenses.
Whatever is left, that’s where your decision-making abilities come into play.
Two rules with this little project mentioned above that you should remember: First, do not base your budgets, even in future months, on an expected promotion and subsequent pay raise. Learn how to figure out your spending NOW, so when you start making more money in a month or six months or a year, you will likely find yourself simply saving more, rather than immediately swiping your credit card more often just because you can afford it. Second, when you calculate what you spend, use the minimum amounts. In other words, don’t just assume you need the latest smartphone with the unlimited data plan, and really do not assume you will need to buy a car with a monthly loan payment of $600. In fact, unless you absolutely have to buy a car (or already have one that you are paying off), don’t even put that in there at all…not yet.
Let’s do this exercise as well, but from a few different angles. Remember first, though–it’s a very well-known fact that everyone in the military makes a different amount of money. We are going to start with a salary on the low end. No PFCs that are reading this need to stay up at night worrying about how to save two grand a month. For that reason, too, we’ll start with typical expenses you have while living (single) in the barracks. Those of you with BAH can probably figure out on your own where the cheaper apartments are.
All figures are approximate estimates.
With that remaining money, assuming no big-time Vegas winnings, you can save and/or invest it and put away a total of $360 in a year. If you get promoted during your first four-year contract, but you start spending the extra salary you’re now getting every month, you’ll put away about $1,440 in your first four years. That’s not very much, but it contains some assumptions based on some heavy spending.
Now, let’s look at a different example.
With that remaining money, assuming no big-time Vegas winnings, since you never go there anyway, you’ll save $16,308 a year. Let’s say you get promoted after two years and make an extra $200/month (more time in service now, too), and you refuse to spend any of that new money. At the end of your four years, you’ll have a grand total of $70,032 saved up. Remember those long-term financial goals you thought about before? That money is enough to buy a couple BMWs. It’s enough to put down a huge down payment on a nice house, too. It is enough to buy a used BMW, and make a down payment on a nice house (maybe not a really really nice one, but you have the BMW to make up for it). It’s enough to put away to pay for your future child’s college education, or to help pay for your own.
Compared with Monthly Budget #1, you are 48 times as wealthy after only four years. If your savings and investments collected interest and dividends, which they usually do over time, you’re probably more like 60-65 times as wealthy as the other guy.
There is, of course, a problem here. You are not spending any money, but you might not be having a lot of fun, either. You were very careful with your spending early on and didn’t let credit card debt become a big part of your life, but that also means you probably have never spent much money in your entire life—you may not even know what it feels like. You drive a $5,000 clunker of a car, but that thing might not make it across the country, should you ever decide to drive somewhere far away. You may not need three new Affliction t-shirts every month, but good luck trying to blend in at the E-club without at least one or two in your dresser. The cell phone, dinner dates at the chow hall, going out once a month, everything listed in that cheap spending worksheet, there’s really nothing wrong with it, but you won’t be enjoying your life, at least from a material standpoint, as much as the next guy. When you look back on your four, your eight, or your twenty years in the military, how many fun times will you remember? Probably not as many as the other guy who spent more money.
This can be a big personal finance dilemma for a lot of military personnel.
Ultimately, you have to exercise those decision-making abilities mentioned earlier. How much to spend, and how much to save? How much spending really makes you happy, and how much just feels like a waste? Does saving actually make you happy? After all, it’s just money sitting in a savings account that you’re not using. It may be accruing some interest, but it’s not giving you a buzz at Dave and Buster’s, and it’s certainly not making your chow hall dinner date any more romantic. You can certainly be happy that your bank account is getting bigger and bigger, but it is important to just have fun sometimes too.
There may be a happy in-between.
With that remaining money, assuming any Vegas winnings go toward that Rolex you’ve been thinking about for the past two years, you’ll save up $8,360 per year. Let’s assume you get promoted once, get a $200/month pay raise, and you decide to spend HALF of that $200/month, and save the other half. After four years of this, you will have $35,840. If you invested it carefully, you may have a little more, say, $40,000. A conservative estimate, and definitely not a guaranteed one, but about average if you play it safe with investing.
What sounds best to you? A fun and frolicking lifestyle with tons of beer, trips to Vegas, and a really nice used car, complete with frequent trips to the Cheesecake factory and an ample supply of Affliction t-shirts…and less than fifteen hundred dollars saved over four years of hard work?
How about the 70 grand saved up, after which you can start touring houses and cruising BMW dealerships? Sounds good…especially since you’ve been cooped up in the barracks every weekend for the past four years, all the while playing Lionel Richie cassette tapes at the chow hall on your Friday night dates.
There is an upside and a downside to both. Without worrying about settling on one or another, though, consider a middle ground that can feel pretty normal AND pretty productive, financially speaking. A fairly chill lifestyle, with a fairly active social life, with a fairly good cell phone plan and a fairly good car, and yes, a fairly healthy supply of Metal Mulisha t-shirts. You’ll never have to take your dinner date to the chow hall, and you will never have to worry, every single month, about how you’re going to scrape together enough money to pay your car loan and your credit card bill. Your personal lifestyle, barracks rooms aside, is pretty good in contrast to that of your high school classmates. The best part of all? You’ll end up with more money saved than most of them. You might even end up with more money saved up than most of your fellow Marines, soldiers, sailors, airmen, and so on.
You can have a lot of fun in the military and still make TONS of progress toward achieving your lifetime goals…especially the financial ones.
The real keys to success, other than a fancy budget worksheet and some self-discipline at the Affliction apparel section, are simply these:
- Think before you spend. If you need more than ten seconds to decide whether you need something, it is probably worth it to go back home and sleep on it.
- Do not spend money just for the sake of spending it. It will not go anywhere if you stick it in your savings account. The manager of your Navy Fed branch could close up the bank one day and burn the building down to the ground, but the government would still reimburse you for your money.
- Keep track of what you are spending every month. That does not mean you bust out a pencil and notepad every time you buy some Cheetos, but log onto your bank account online once or more a week, just to check what is going on with it.
- Finally, have some fun when you get the chance. It is not worth it to just sit and play solitaire on your computer 24/7/365. Go drink (if you are allowed), go party, go have fun, and remember, as you build up your spending and savings skills, that the longer you are responsible with your money in life, the longer you’ll have to enjoy the fun times in life.
“Pay yourself before you pay anyone else.”
The last chapter talked a lot about saving as a result of careful spending. Aside from getting into a discussion about the finest ceramic piggy banks, there is not a lot left to be said in this book about HOW to actually save. There are a lot of options available to you in terms of HOW MUCH to actually save, and it largely depends on what kind of lifestyle you choose for yourself, though obviously the higher savings-amounts are highly recommended and the lower-ones are to be avoided if at all possible. You should save, and you should do it early and often in your military career. You already know it is important to do it. One, because excessive cans of Axe Body Spray make your barracks room start to smell like Abercrombie and Fitch. Two, and far more importantly, you need savings, no matter what kind of car you want to drive some day, what kind of house you want to live in, how many kids you want to have, or what kind of college degree you may think about pursuing after your EAS (believe it or not, the G.I. Bill does not pay for all of your college expenses, particularly if you go to a private university that charges more than most public schools. You will want money saved for your education).
Why is savings so critical, other than obviously building up toward our lifelong dreams? The answer is: a Rainy Day fund. No, you don’t need to save a thousand bucks for an actual rainy day, when all you want to do is lay around in the barracks watching Optimus Prime duke it out with Megatron and Starscream. A $20 bill will probably take care of most of your immediate needs, in that case. What rainy day funds are for, in the metaphorical sense, are the times that you have immediate expenses, often unexpected ones, for which you need to come up with some cash in order to take care of. It is easy (almost unfortunately, it is SO EASY) to pay out cash for immediate expenses, if you have that money saved up in your savings account. If you do not, you may have to borrow money to take care of these expenses, and as you know, borrowing comes with interest payments—not something you want to have to worry about, if at all possible.
Imagine, for example, that you have a car and your transmission goes out. If you do not have a warranty because you are on the cheapskate budget and you pay minimal expenses on your clunker-vehicle, you’ll need to pay out a big chunk of change for that transmission to get fixed, at least, if you ever want to drive your car again. In other cases, the emergency may involve someone else. Say you have children, and your kids get a bunch of cavities. If Tricare Dental doesn’t cover all the expenses, you’ll have to pay out of pocket. It could be a few hundred bucks…or more. Not to mention having to replace all the sugar cookies in your kitchen cabinets. Perhaps you have a parent or a grandparent with some kind of medical or other expense that they cannot handle. If you are the only family they have, it may be up to you to help them out. Even if you’re not the sole provider for someone else, it’s nice to be able to just be able to help others, sometimes when you don’t expect such a need to arise. If your friend Steve from down the hall has lent out beer money to too many borrowers, and they have all defaulted on their debt payments, Steve may need help paying his car loan that month. He helped you out in a pinch, so it would be good to return the favor.
On a more upbeat note, there are often some pretty incredible opportunities that come our way, both in and out of the military. These can be both spending and investment opportunities. Often, they present themselves when we least expect them, particularly in the military. Maybe you’re getting deployed to Korea on a week’s notice, and you’re going to be there on an exercise for an entire month. There is a ton of awesome stuff in Korea that can be bought for very good prices, but if you do not have a few bucks in your spending-contingency fund, you may only be able to scrape together fifty dollars to buy a couple knockoff NFL jerseys (Again, remember—some money should be spent, from time to time, on fun and reasonably priced stuff). Another example is when military personnel PCS to another duty station, they often sell their cars. As mentioned back in the “Lemon Lot” section in an earlier chapter, a lot of cars there can be bought at extremely good prices. If you have a few thousand dollars saved up, you can capitalize on these opportunities when they come along.
Finally, there is another wonderful way that saving up cash (“cash” in this sense just means having dollars in your savings account, not literally storing $100 bills in your pillow case) can provide ENORMOUS opportunities. We’ll look at that in the final chapter of this book, which is just a few pages away—the opportunities found in investing. Investing, especially careful, well-timed, and savvy investing, involves a lot of patience, skill, and discipline, and it also requires having something to invest—such as cash you have saved up. When you save your money carefully, you increase the opportunities you can gain through investing, since you have more cash to invest when the time is right. Without any savings at all, you may otherwise find yourself stuck—watching other people make money in real estate, small business, and yes, most commonly, the stock market, while you are still focused on paying off your credit card.
Do you want to spend your time figuring out how to pay your credit card bill…or do you want to spend your time deciding how you can make money investing?
Many people, actually, end up doing both. Without enough savings, you may have to make some difficult decisions when it comes to paying your expenses. If you have investments, such as a house that you rent out to others, you don not want to have to worry about “liquidating” them, in other words, selling them off, for whatever price you can get. If you want to sell this house, or the stocks you may own, you want to do it ON YOUR OWN TERMS, when you feel it’s a good time to sell—not on someone else’s terms. What if you buy 100 shares of stock in, say, Coca-Cola, and it declines by $5 a share? In the long run, it may not be a big deal. Coca Cola is a very old and strong company, and it pays dividends each year—you will probably get your money back, and then some, somewhere down the road. If, however, you have unforeseen expenses, though, that you can’t pay for out of your savings, what happens then? You can’t avoid the expenses, if they’re important, so you may have to sell all your Coca-Cola stock immediately…AT A LOSS…in order to pay the bills. In other words, if you sell your stock at a loss because you had no savings, you not only have to pay those bills, but you lock in a loss of 100 x $5, or $500. It’s like adding insult to injury.
Finally, it’s good to have some cash in your bank account, period. It won’t go anywhere. Military-friendly banks, such as Navy Fed and USAA, along with most other savings banks in the country are FDIC-insured. FDIC stands for Federal Deposit Insurance Corporation—it’s the part of the government that backs up your money just in case the bank goes bankrupt and cannot give you your money back. The U.S. government will reimburse you for the entire amount. Moreover, this cash is helping you build up to whatever savings goals you have in mind. Over the long run, it will be best to invest your money in something other than savings, so that it grows more, but having that comfortable cushion in your savings account will help you get through a lot of short-term emergencies, and will also provide you that opportunity to capitalize on spending and investment opportunities that show up unexpectedly.
A lot of military personnel hate saving money. They think saving is boring, especially compared to other things you can do with your money, or other ways to GET your money. To some extent, they are right. What is more exhilarating—getting paid $1,000 after two weeks of hard work and putting half of it in your savings account…or going to Vegas, rolling the dice, and walking out with twice that much in cash…after half an hour of fun at a craps table?
In the short term perspective, that makes sense—IF you are lucky enough to win money gambling. It may not be exciting to allocate $500 or $1,000 per month to your savings account, but the opportunities that it can create are incredibly exciting, if you play your cards right (no pun intended). Equally importantly, if you can try saving for a little while and you see your savings account balance go up and up, it provides a real sense of accomplishment. Remember that feeling you got after boot camp, when you finally graduated and entered the armed forces? The boot camp was the hardest part of that transition you made from civilian to Marine, soldier, sailor, or airman, but you know perfectly well that it started way before you showed up on Training Day One. All the mental, physical, maybe even academic preparation that you did before boot camp went into that graduation day as well. It was a much longer journey than just those 2-3 months of initial training, and that is why it is so much more important when you complete it.
Try saving your money for a couple of months. Try it for a year. Try saving carefully for the entire duration of your contract. It will not be easy—at first. There will be a couple of extra beers here, or an Affliction t-shirt there, which is calling your name. If you can simply get used to telling yourself “I’ll get this…next month,” once in a while, the rewards are incredible. Warren Buffett, the most famous investor of all time, has said: “Pay yourself before you pay anyone else.” The government may pay you first, but they are paying your checking account. Take some of that money, whatever you are able to save (after your bills are paid!) and “pay yourself” in your savings account…before you go to the PX to load up on Metal Mulisha and Axe. After you’ve done that, you have got your spending money. You have accomplished the most important goals, so make sure to enjoy yourself—that is pretty important too.
When you have been responsible with your money for a while, and you are finally starting to really achieve your lifetime financial goals, you will be proud as hell that you learned how to do it…and that you did it. Whatever it is you end up getting, either the house, or the car, or the business, or the skyscraper, or all four, you’ll know that you earned it, and that is a damn good feeling.
To wrap up this chapter, let’s look at a sample of what you can do with your paycheck, and why. It does not, by any means, have to look exactly like these charts, but should provide some understanding as to why you need to do each activity with your money.
Here is a chart with each activity, broken down by the approximate part of your paycheck that it should make up. Spending, which includes all your bills as well as your Affliction t-shirt budge, Axe body spray budget, etc., is obviously a big part of your month. Saving, for all the reasons mentioned above, is crucial. Investing, which should be a big part of your long-term financial plan, is something you should put more money toward than savings, for reasons to be discussed in the next (and final) chapter. Notice, too, that there is a small section for speculating—it is not a good idea to have this be too a big portion of your overall spending, but it can still provide the opportunity for some big gains and excitement, IF you want to give gambling or penny stocks a try. One final sliver—yes, it is Blowing Money. It should never be more than 1% of your paycheck, and if you can keep it to less than that, great. However, once in a while, it is okay to just let yourself go. It is like going on a hardcore diet, trying to lose 20 pounds in two months, yet giving yourself that one cheat meal. A brownie with stuffed-crust pizza, maybe, or that Double Whopper with Cheese and the large side of onion rings. ONE PERCENT, no more. One percent of a $2,000 paycheck equals $20 a month. That should be enough for at least two HDMI cords that you have absolutely no use for.
How does this relate to real life? Again, this is modeled for a service member who lives in the barracks, but can apply to almost any living scenario. About 20% of the time, you go home and just lie down–you do nothing but browse Facebook, read a book, watch some YouTube videos, and go to sleep. There is absolutely nothing about that worth talking about tomorrow (unless the book or the video was really good), but it is safe and harmless, just like saving.
Perhaps 45% of the time, about half your nights, you leave your unit building and go back to the barracks. Take some pre-workout formula, head to the gym, get a good workout in, then go back and play some video games and drink a beer with some buddies. If you haven’t blown your $20 yet for the month, maybe you can stock up on video game character skins. You have a good time with your friends, chat about whatever you did last weekend, get promoted on Call Of Duty: Black Ops II, and hit the hay a little later. Overall, not a bad night—nothing crazy, but it keeps you entertained until tomorrow morning.
Maybe 30% of the time, you go out somewhere. Maybe this is your romantic dinner date at the Cheesecake Factory, maybe it’s off base to the bar with your friends, maybe it is even to the club. Here’s where interesting things happen. Maybe you meet an attractive girl/guy and get a phone number. Maybe your friends get wasted and you end up driving them all home as they sing along in drunken unison to “American Pie” playing on your iPod. Maybe you meet three attractive girls/guys and get three phone numbers. Maybe you go on your dinner date and…well, anyway. Whatever happens, you sank some money and time into your activities for the night, and you are very likely going to have some interesting “returns” on your investment.
4% of the time, you go “speculating.” What could this be? There is Las Vegas, or any other place with casinos, which would fit into that category. You have no idea how good or bad a time you’re going to have; after all, gambling is an uncertain thing. However, there IS the possibility of big money, or at least a lot of fun. It is true, after all—Vegas clubs are a lot more fun than your average Gas Lamp District bar in San Diego, although they are more expensive to get into. You could have a phenomenal time with that bottle service you bought (remember that lucky craps game you played at the Wynn?), but of course you run the risk of losing your money. It’s a little like going on liberty overseas, especially late at night. You could run into a lot of incredibly interesting party scenes. You could go to some crazy clubs and have a great time, one that you will remember for the rest of your life. You could also get burned—in more ways than one. It is a crap shoot, literally and figuratively, when it comes to some of these experiences. They will probably create memories that last a lifetime, but you have to be careful.
Finally, there is the craziest time you will ever have, and this is the extreme edge of the “speculation” experience. Be careful and smart, or at least have someone else WITH you who is careful and smart, and nothing bad should happen. For the record, do not go out and do anything illegal. Do not do anything to get yourself hurt, but go out and drink and have a good time. Do not bring your car keys, because you will be taking a cab home anyway. Maybe it is the day after you got back from a deployment, maybe it is after a payday and you have already put your monthly savings into your savings account (and leave your debit and credit cards at home—you do not want to spend too much on this night!). Perhaps you and some old friends from high school are getting back together for a five-year class reunion. Or maybe it’s just the best Vegas trip you’ll ever have, because that field exercise was miserable and you have been thinking about this weekend all year.
Whether you wake up with Mike Tyson’s tiger in your hotel room or not, though, you had this experience because on some level, you needed it. That is the reality of life in the military. We have a lot of tense situations, but more often, we deal with a lot of boredom and a lot of crap in our day-to-day lives. There is not always a lot of opportunity to just go and cut loose for a while, and when that chance does present itself, it is nice to take advantage of it. Buying bottle service in a club will cost a lot, but once in a while, it gives you that morale boost you were looking for.
You have heard probably a million times to “party with a plan.” If that’s what it takes, do it. If not, party smart. It is not hard—just leave the keys and your debit card in the hotel room so that you do not drive drunk and you do not withdraw too much money from your bank account. That does not mean you have to make a checklist on a legal pad of what casinos you are going to visit. The greatest parties, as you probably know, are completely spontaneous ones. Woodstock, the greatest concert of all time, became famous mostly because of how many people showed up—completely unexpectedly. A lot of the great moments in your life will be unexpected as well.
The moral is not to go out with five hundred bucks cash at the first opportunity, just to look around for whatever fun you can find. It is simply to say that there are times, occasionally, when you can be less than absolutely-100%-thorough with how you spend your money. It is like cheating on that diet. You can do it once, and it will actually help reset your metabolism. It gives you that break from the discipline that you want—and need. Spending is not much different. We, as humans, are meant to enjoy our lives, and those of you in the military deserve it as much as anyone. Just remember to keep your long-term goals in mind, no matter what you are doing, or where you are doing it.
You’ve seen so far how blowing money and speculating are mostly wasteful, yet have their own bit of usefulness in their own right. We have gone over spending and saving too, and why they are both important to do and important to keep track of. This next chapter, the last one of this book, will provide some clues to the most important question of all:
How do you make your money grow and “work for you” over time?
This book will not provide all the answers. Unlike a lot of other personal finance books, there are at least a thousand books written on investing. It’s one of the most debated-over subjects in the news, in universities, and in Corporate America. It can make you poor, if done badly, but can also make you very rich. More than likely, it will get you somewhere in between. What it will also do, though, is give you the best shot, over time, of achieving your lifelong financial goals and reaching, one day, that financial prosperity that you want so much.
Investing is sometimes the most interesting, sometimes the scariest, and almost always the smartest way to make your money grow—one day, to the point where it is literally “working for you.” It is not always easy, it is not always fun, but it is usually, over time, very effective in helping you go, for example, from having nothing but a sea bag and $20 in your wallet, to having a few thousand dollars saved up in mutual funds, to having a big down payment on a nice house, to maybe someday having several houses—and everyone in them paying you rent every month. To define it:
Investing is spending money (or effort) on something with the reasonable expectation of making a profit.
It seems simple, but a lot of people screw this up, particularly when it comes to speculating. As was mentioned in the chapter on speculation, many people put down money on something and think they might make a return on their speculation, but they haven’t “done their homework,” and therefore don’t really have a certain idea as to whether or not they will make any money. A lot of speculation is fueled by excitement, which is understandable to some extent. If all the other guys in your squad buy penny stocks and have made $10,000 apiece in the last week, do you want to be left out? No, of course not, especially when you are sitting there in the barracks while they are out shopping for new cars to buy. The urge to get in on the latest “investing” craze, which is usually just speculation, is almost irresistible. The problem is, and always has been, that most of the time, your friends will not actually make money. The odds are high that in the end, you’ll be the one still holding on to your money, and they’ll be the ones who have lost it.
That is where investing comes in—it is different from speculation because you have done a little research (it doesn’t usually have to go on for days and days, but should definitely be more than two minutes, like the speculators usually do) into what you want to invest in…then you invest. Again, investing is not always in the form of just buying and selling stocks. It can be buying a house, buying a business, whatever you want—as long as you can prove to yourself that you will make a return from your investment. With that “reasonable expectation” that you’ll make a profit, you are already on track to grow your money, rather than blow it on tulip flower bulbs or Dot.Com stocks.
To be fair, investing is not always as exciting as speculation. You do not usually flip a 100% profit in a short amount of time, the way you can in Las Vegas. It takes patience, and that is a very hard thing to master in the military. If there is one thing that is hard to overcome either in the barracks, on a deployment, or in life in general while serving in the military, it is boredom. Throwing 50 rocks at a telephone pole on a 115-degree day may seem dumb to civilians back home, but if you have ever been to Iraq, you know that it can at times be the most interesting thing in the world. Life can get very slow at times, and so it is natural that you might want to take all of the $700 that you saved this month and head over to a casino. A lot of you may think: “It doesn’t matter whether I win money or lose it…only that I end this boredom in my life.” That’s the danger, right there. Without exciting things that keep you engaged 100% of the time in the military, you want to find ways to get those exciting things…and that is where the temptation to speculate comes in.
One of the best ways to fight this is simply to find other things to get excited about. You cannot always go outside the wire, nor can you always be travelling from point A to B, staying engaged in whatever your task is. There will always be those low-key, hum-drum days in the military, but the trick is to find exciting stuff to do that is not simply blowing your money, or speculating. Working out, throwing rocks at telephone poles, watching movies, reading books, whatever it is—you’ll build up a lot more wealth over time if you avoid using your money just for entertainment. There will always be the opportunity to do so, and it is not a bad thing to spend some of your money on this entertainment. A $20 poker game is pretty fun, especially at the MWR (Morale, Welfare, and Recreation center) overseas. Playing five times a day, though, is not going to get you any richer, unless you happen to be really good at poker.
Another rule of thumb is this: Keep your speculation money separate from your investing money. No matter how good or bad the speculation (or the investing) gets, don’t commingle the two funds. If you are a poker all-star and you are bringing in $300 a night at the MWR, keep that cash separate. If you want to take some of it off the table and put it into your investing pool of money, that is fine—it will grow over time and you can forget about it for a while. Do not ever pull your investing money into speculation, though. If you have been on a roll with the card games and you are ready to take your talents to South Beach — sorry, Las Vegas — may you have the best of luck. Do not cash in your investments, though, just so you can hit the $10,000 minimum tables. The odds are extremely high that sooner or later, you will regret your decision, and all the patience and planning that went into your investments will have amounted to nothing.
In terms of real investing, a lot of people see it as simply buying and selling stock shares and hopefully making a profit. It is more than that, though—you are buying a piece of a business, however small that piece may be. If you buy five shares of Coca-Cola and there are five billion shares that actually make up Coca-Cola’s stock, you own one-billionth of the company. It seems small—really small, in fact. If you see a Coca-Cola delivery truck unloading outside the PX, five shares is probably equal to a flake of black paint on the rear bumper. However, that tiny sliver of the company that you own will still go up and down in value as Coca-Cola succeeds—or fails—in their business. The same applies to every stock you own. No matter how much or little you own of a stock, or any other investment, you still own a chunk of the business, and you are entitled to a chunk of its profits, as well as a say in how it does business. That company, whether it is Coca-Cola, Under Armour, or [email protected], is in a small way part of your personal property. That does not mean you can run up to the Coke truck and start scraping off bumper paint, but you can still look at it and know that you are a partial owner of that truck, as well as every other Coke truck, bottling plant, and soda bottle in the world.
When you invest in a company by buying its shares, you hopefully have a reasonable expectation that it will succeed in business, or continue to succeed, and that you will be rewarded for your investment by seeing your stock shares go up in value and/or receiving money from the company—a share of the profits. You’re spending money on a long-term project, and you’re taking ownership in a real thing—not just some paper shares of a stock. It’s good to keep that in mind, especially when you decide whether or not investing in something is a good idea.
You may be wondering: Why, again, is investing so great? If putting money into, say, the stock market is boring compared to speculating, why should you bother? It will not be that exciting most of the time, and you cannot just take the money out any time you want and spend it. What is the big attraction to investing?
Remember Chapter One? Your long-term goals—whatever they were, they obviously are not things that you can just go out and achieve tomorrow…in most cases. When it comes to achieving those long-term goals, you want to utilize a long-term mindset. When deciding between saving money, investing it, taking it to a poker table, and stockpiling HDMI cords, you should think about which decisions have, over time, been the most profitable for people. For investing in stocks, you want to know a few terms. The first is the S&P 500, usually referred to as simply “The S&P.” It stands for Standard and Poor’s 500, which is basically a basket of 500 of the biggest companies in the United States. Coca-Cola, Wal-Mart, Apple—they are all in there (For those of you wondering…Unilever, the company that makes Axe body spray, is not, because they are not from the U.S.).
The S&P, since it covers so many of the biggies in American business, is considered the benchmark of the American stock market. If the S&P index, which trades at an index price (currently around 2,000, but has been a lot lower in recent history), goes up, it means that over the broader stock market, stocks went up in value. If the S&P goes down, then in the aggregate stocks lost value. Another term to know is mutual fund, which, like the S&P, is a basket of stocks (or bonds, or other investments) that a money manager puts together. If you put $1,000 into a mutual fund, that fund manager will spread it out over anywhere from 10-20 to maybe 1,000 or more investments. Technically, you will have a tiny bit of money in each one. It may seem kind of strange to imagine holding, for example, fifty cents worth of Apple stock shares, but there is a reason why mutual funds spread your money around like that. If one investment does well, that is good, but if another goes down, at least it will not impact your money very much. Mutual funds, by spreading the risk over a lot of investments, limit the downside (and upside) and create a less-exciting but safer investment opportunity for you. This is what is called diversification. It is like having ten buddies down the hall and playing video games and drinking beer with each one of them at different times. If it is a Wednesday night and one of your friends is sick, you still have nine others to go chill with.
There are many mutual funds, and they all advertise different amounts of risk and return. A fund may tell you that it has returned 12% on average over the past ten years, although if its value swung around a lot more than other mutual funds, you could say it was more risky. Meanwhile another mutual might have only gone up 5% annually over the past ten years, but if it stayed pretty consistent in its value, you might say it was less risky. Mutual funds are often compared to the S&P, which is important, because it is the broadest mutual fund available. You can buy into the S&P yourself, simply by buying into an S&P index fund on USAA or Navy Fed. Here is where it gets interesting (as said earlier, this is why stocks are a better investment over time than poker, HDMI cords, or most other opportunities):
Since 1900, the S&P 500 has gone up, with dividends re-invested, on average, just under 10% annually.
If, in 1900, you had invested only one dollar into an S&P index fund, you would now have $45,333. If you had invested $100, you’d have four and a half million dollars. Not bad for something that you never have to look at, right? This increase in value, of course, assumes that you re-invest your dividends.
What are dividends? They are little payments you get, usually every three months, from companies or mutual funds that you own. If you own shares of Coca-Cola stock, you will get (as of this time) 33 cents per quarter (per three months) for every share you own. It is not a huge payment, of course, but it comes very regularly, does not cost you anything to receive, other than a bit in taxes, and you can re-invest these dividends. You also will not pay a commission when you receive them. If you have 100 shares of Coke stock, you will get $33 paid to you every three months this year. You could take that money and buy some beer, or you could just let it re-invest itself—effectively growing your stock. If Coke happens to be $33/share at the time, you will get one free share added to your holding. Next quarter, you will get even more in dividends—since you have 101 shares. If you’ve ever rolled a snowball into a snowman, you can imagine how this works—that is how dividend re-investment works. Again, it’s great in that you do not have to do anything. Just plant the seed and let it grow.
(Side note: Going back to the example of Coca-Cola–if you had bought ten shares of Coca-Cola in 1919 for a grand total of $400 when their stock first came onto the stock market, and not touched it until now while patiently re-investing the dividends, your stock would now be worth approximately one hundred million dollars. Just something to think about).
Again, your investments can grow over time simply as the prices go up. However, if you really want the “snowball” to get bigger, you want to re-invest the dividends. Obviously, you can add more snow to the snowball whenever you are able to. Remember those savings you calculated earlier, where you saved $695 per month, and $8,360 a year? Let’s say you take that $8,360 at the end of the first year of your contract, invest it in an S&P 500 Index fund, and just leave it there while re-investing the dividends. We will assume it grows at 10% per year, which is roughly in line with the rate at which it has grown historically. Here is what it will look like, over the course of a 20-year military career.
(This, by the way, assumes you invest all of your saved income. It is an aggressive plan, so you should consider saving some as well, or at least establishing the rainy day fund. You can do this by cutting back on the investing, OR by simply spending less and having that extra amount to keep in a savings account).
At the end of:
Year 1: $8,360
Year 2: $9,196
Year 3: $10,115
Year 4: $11,127
Year 5: $12,239
Year 6: $13,463
Year 7: $14,810
Year 8: $16,291
Year 9: $17,920
Year 10: $19,712
Year 11: $21,683
Year 12: $23,852
Year 13: $26,237
Year 14: $28,860
Year 15: $31,747
Year 16: $34,921
Year 17: $38,413
Year 18: $42,255
Year 19: $46,480
Year 20: $51,129
Not too bad—your money has multiplied more than six times! However, you know how inflation works—over time, money buys less and less, so 20 years from now, that $51,129 might only buy a nice car, rather than a down payment on a house. Now, let’s say you save that exact amount every year, and you add it to your total investment on December 31st. If you make the same investment at the same time every year, it will look like this:
Year 1: $8,360
Year 2: $17,556
Year 3: $27,671
Year 4: $38,798
Year 5: $51,038 (this looking good yet?)
Year 6: $64,502
Year 7: $79,312
Year 8: $95,604
Year 9: $113,524
Year 10: $133,236
Year 11: $154,920
Year 12: $178,772
Year 13: $205,009
Year 14: $233,870
Year 15: $265,617
Year 16: $300,539
Year 17: $338,953
Year 18: $381,209
Year 19: $427,690
Year 20: $478,819
Notice something interesting—by your 20th year, if this keeps up, you’re making almost $50,000 a year just by letting your investments sit there. You also, by the way, have almost a half-million dollars. That is not too shabby for a military veteran, and it is based on the assumption that you only saved $8,360 a year. If you save $10,000 a year, you’ll have $572,750 total at 20 years. If you are wondering how much you need to save to have a million bucks by the end of your 20 years, you will have to save $17,500 every year and invest it annually. That is obviously pretty tough, especially your first few years. No amount of chow hall dinner dates will get you that much. But if you build up your saving skills early, it is definitely in the ballpark later on during your career. Even if you get out after only four years, you can develop that skill now and have it down pat after your EAS—and you’ll be way ahead of plenty of your friends back home. One note here—if you invest this money into a retirement account such as 401(k), you won’t be able to spend the money at your military retirement (unless you literally stay in for forty years), but instead you will have to wait until you are much older. If you keep it in an S&P 500 index fund in an investment account, you can pull it out any time you want, but you will pay taxes on your dividends every year. Still, it will not be nearly as bad as some other taxes that come from less-disciplined investing—more on that later.
Going back to the subject of inflation—as you know, money gets less valuable over time. If you grew up as a kid in the 90’s, you may remember 29-cent-hamburger Mondays at McDonald’s (and 39-cent-cheeseburger Wednesdays). Those days are gone. Gas used to be 10 cents a gallon, back in the 1960’s, but we probably will not see that ever again. Immediately after World War II, a year of college tuition at Yale University was $500. It is now over $45,000 per year (room and board got more expensive too, by the way). That’s how inflation works—prices just go higher over time. People tend to make more money (minimum wage was once only 25 cents an hour) but they have to spend more of it too.
When you are planning for the long term, you want to keep this in mind: You can sock away every dollar you earn into a savings account, but it won’t earn much interest—in fact, it will be less than inflation, year-over-year. In other words, the $500 that you save today (2015, as of this writing) may grow in your savings account into $530 by the year 2020, but that $530 in 2020-money won’t be worth as much as $500 was worth in 2015. Inflation, which almost always outpaces the interest on your savings account, can eat away at your “buying power.” Having money in stocks, of course, is a way to “beat inflation”—your money will usually grow at a rate that is much higher than year-over-year inflation, and so you will still be truly wealthier in 20 years, even after you factor in inflation. That $478,819 that you might have saved up at your 20-year retirement won’t be worth that much in today’s money, but it will be worth a lot more than if you just put your $8,360 into a savings account every year.
Before you freak out and stuff every dollar you have into an investment, though, remember what was said earlier about savings. You ALWAYS want to have a rainy-day fund, just in case something comes up. It will not help you if you put all your money into investments and then suddenly need to pull some out—especially if it’s temporarily declined in value. You lose money that way. In addition…
You may not always have good investment opportunities. Sometimes it pays to wait until they present themselves.
The question is, of course, how do you know when this time is? Does it even matter whether you know or not?
The title of this chapter presents by far the most difficult question in all of finance. Thousands of bankers and traders and money managers on Wall Street and around the world in London, Hong Kong, Singapore, and a hundred other big-money places spend countless hours trying to figure out how to make more money than everyone else by investing. Some investors, such as the famous Warren Buffett from Omaha, Nebraska, have made billions of dollars doing just this—investing wisely enough to make not 10% annually, but as much as 20% (on average) over a long period of time. Buffett, along with a number of other savvy investors, did not need to spend his whole life on Wall Street in order to make billions of dollars, but he did need to make smart decisions. Thankfully, you do not have to be on Wall Street either to make money in investing. This chapter will discuss a number of the ways in which you can invest (other than the S&P 500 index fund) and make money, as well as some things to watch out for—after all, investing is a risky business, and if there is one thing that can ruin your day, it is losing money.
If you want to invest, you can open up a brokerage account, for instance with Navy Fed or USAA. This is sort of like a checking account—you can transfer money from your checking or savings account and it just sits in the brokerage account, until you decide to invest in something. At that point, you decide what it is you want to invest in, say, shares of Pepsi stock, and then you decide how much you want to put into that stock. You could put in just a few dollars, and limit your risk, or you could put in thousands of dollars—creating a risky situation, especially if you have not diversified your investments. If you want to avoid risk, it sounds normal that you should just buy a few dollars’ worth of Pepsi, but there is one catch—if you want to buy stock shares, you have to pay a commission to the brokerage firm (USAA, Navy Fed, whoever) as sort of a buyer’s fee. You have to do this when you sell stock as well. This commission is not very much, usually. With USAA, it’s $8.95 per trade. However, if you only want to buy $100 of stock, that commission is 9% of your trade. That’s a huge chunk of your overall investment, which is more or less wasted by giving it away to the broker.
If you invest in much larger chunks, say, $2,000 at a time, that $8.95 is less than half a percent of your overall trade, so it will seem like more of a drop in the bucket, as far as fees go. Again, though, $2,000 is a lot of money, especially when it took you three months of strict limits on your Metal Mulisha t-shirt purchases in order to pile up that much money. You may not want to risk that much on one single stock—anything could happen to that company, after all. If you’ve got another $20,000 to invest in other stocks, you can afford to take that risk more than if you only have that $2,000, since you can be more diversified across other investments. With only that $2,000, though, it is usually a better idea to buy an index fund, such as an s&P 500 mutual fund or an S&P 500 Exchange Traded Fund (or “ETF,” which offers some tax advantages over mutual funds)—it is far more diversified, and you will not risk all your savings on one company in your portfolio, which is a fancy, business-like term for “all of your investments.” You can also look around for brokerage firms that charge lower commissions.
Beyond the nitty-gritty details of how you actually trade a stock, there are two main ways to invest in, for example, the stock market. One of them is to wait and try and “time” the market, essentially trying to buy a stock (or stocks) low and to sell it high, locking in big profits—IF you time it right. This is naturally a riskier proposition than the alternative, which is basically the one laid out in the last chapter with the annual investment of your year’s savings. This alternative, which is a little less interesting but also MUCH safer, is called “Dollar-Cost Averaging.” Dollar-Cost Averaging, or DCA for short, means investing the same amount of money at regular intervals. In the case shown in the last chapter, it was once a year, but you can make it far more frequent. Saving up over $8,000 just to invest it at the end of the year can be hard to keep track of, and it’s better to be more frequent with DCA anyway. No matter how far up or how far down the stock market goes, when you invest the exact same amount of money at exact intervals, you will, over a long time period, buy those stocks at the average that they have been selling at, over the time period. With those twenty years mentioned in the earlier case, you can invest the exact same amount ($695) once a month, or you could invest half as much ($347.50) twice a month, which is even safer, since you are not putting down as much money at one particular point. If the market happens to spike upwards just when you make that investment, you will end up buying less stock than if the market happens to decline. You might not want to put all $695 down an that one high-priced moment. You really do not want to put 12 months’ worth of that $695, or $8,360, down on one high-priced point of the year. Spreading it out will ensure you are being really safe with your money—again, not quite as exciting, but you can sleep better at night. Of course, when considering DCA, you also want to think about how much you are paying in commissions for each trade.
It is also important to think about investing in specific companies. Buying the S&P 500 index fund is safer, but it is also boring. If it continues the way it has over the past 100 years (notice the difference between that and speculation? It has been on an upward path for a very, very long time, unlike those Dot.Com stocks, which shot up for just a couple years before falling apart in front of investors’ eyes), it may continue to grow, on average, about 10% annually. There is the opportunity, however, to make more than 10% annually, in other words, to “beat the market,” or do better-than-average. Those money-managers mentioned at the start of the chapter spend hours, days, months, years of their life trying to figure out how to do this, but most of them do not succeed in the long run for two reasons: 1) for every person who buys a stock and makes money off of it, there is another person who sold that stock and missed out on that profit, and 2) money managers charge a fee, which reduces returns to the investor. Investing money, especially when you are trying to “beat the market,” is a really dog-eat-dog world. When you factor in all the commissions that you have to pay when you buy and sell individual stocks you end up paying money that doesn’t do anything but make your broker richer. These commissions eat into your overall gains.
Another thing to think about—if you sell a company’s stock less than a year after you bought it, you will pay “short-term capital gains” taxes on whatever profits you made. These taxes are much higher than they would be if you held a company’s stock for more than a year. If you are trying to experience a big-time rush of excitement from buying and selling a stock quickly, keep those taxes in mind. You are paying a price for just being a short-term stock trader. If you want to be a real investor, though, and think of a stock purchase as actually buying a piece of a company, you may be less inclined to dump the stock six months, six days, or six minutes later. Holding on to that piece of the company you own for a long time will keep you from paying those extra commissions—you will also rake in more dividends, and you will not get stuck paying short-term capital gains taxes.
Even though it seems like the S&P index fund, or some other mutual fund or ETF, is the safest and cheapest route to go with investing, it can still be tempting to buy individual stocks. There is always the chance that they will do better than average, which means you’ll make more money than the average investor. Furthermore, it is more exciting, and this can be nice while you are in the military, especially on those boring, rock-throwing days. Reading the news about the company (or companies) in which you own stock is usually more interesting than reading about the U.S. economy as a whole. It also gives you a warmer-and-fuzzier feeling as an investor to know you own portions of specific companies—companies that you have researched and are proud to own. Just remember—diversification is key. You could be the biggest fan in the world of Axe Body Spray, and maybe you are absolutely convinced that Unilever is going to be the top company in the world some day because of how outrageously good a product you think Axe is. Maybe you love Apple because your iPhone 6 allows you to count your steps throughout the day, bringing a sliver of entertainment to your life while you are stuck on a weekend-killing Saturday duty watch. Whatever it is, if you buy specific company stocks instead of mutual funds or ETFs, buy stocks of companies in more than one sector—i.e. not just technology or personal hygiene.
Remember the Dot.Com bubble in the late 1990’s—people invested way too heavily in technology and got burned. Likewise, something could happen to Unilever. You do not want all your eggs in one basket. Spread your money around companies in different areas, so you do not get burned. Remember—it never hurts to have some of your money in an S&P index fund. Whoever manages that fund does the diversification for you, so you do not have to worry about how much money you have invested in cell phone technology and how much is allocated to farm equipment.
While investing may seem really simple as far as a process is concerned (open a brokerage account, find something to invest in, and click “Buy”), it is a lot more difficult than it looks, and there are a lot of things to watch out for. Remember, as easy as it is to make money in the stock market, Vegas, or anywhere else, it is just as easy, if not easier, to lose money too. There are a lot of pitfalls to watch out for.
When you are not Dollar-Cost Averaging, it is really tempting, especially while in the military, to check your stock prices every few minutes. This is usually a bad idea. If the stock happens to be going through the roof, it is pretty exhilarating to watch your stock holdings get more valuable in a short time. It is the same rush of excitement you get when you are playing craps and your chips are piling up. However, when the stock is going down, fear can set in very quickly. Human psychologists have found that the negative emotions investors get from losing money are twice as strong as the positive emotions they get from gaining money. In other words, most people feel about as BAD about losing $500 as they feel GOOD about making $1,000. This fact of human nature can sometimes cause you to do the wrong thing at the wrong time.
Can you trust yourself not to get too excited when a stock goes up, or panic if the market drops?
Research shows that investors sell too early when stocks go up, but hold too long when stocks go down. When you’re checking “MCD Quote” on Google every fourteen seconds, trying to find out what’s up with your McDonald’s stock shares, you may sell when it’s up a little bit to lock in that gain since it makes you feel good. But maybe the stock ends up a lot higher a year later, so you miss out. Similarly, you may buy some stock that immediately goes down, but you will not sell it, since it would be painful to realize the loss and “it’s got to come back.” This stock might continue to fall.
Also, some investors see a market pullback, panic, and sell everything they own. Then when the market rebounds, they are out of stocks at just the wrong time, and miss the rebound. This is not the right way to approach the stock market. If you are going to invest in stocks, you need to keep a long term mindset, and this means not reacting with panic when the broader market moves against you.
Remember that safety cushion that you have from your savings account? If your stocks decline AND you come across some unexpected expenses, this safety cushion will protect you from having to sell your investments at just the wrong time. If you think you might be tempted to do something dumb if you check your stocks 700 times a day, or constantly watch the market so you can time it, you should either: A) avoid investing in specific stocks to begin with, and/or C) DON’T CHECK THE VALUE OF YOUR ACCOUNT ALL THE TIME. You can get plenty of excitement from just reading about the stock market, or companies and learning what you are investing in, as well as looking out for new buying opportunities. But do not get hung up on short-term price fluctuations. It will drive you bat-shit crazy.
BUYING OVERPRICED COMPANIES
Another thing to watch out for when you invest is buying company stocks that are overpriced. Over the very long run, most good, solid companies’ stocks do go up, especially those with dividends, but you will not make much money off these price-rises if you pay too much for the stocks. Let’s say you buy Company X at $100 per share, but at the time it was really only worth $50 per share—you simply overpaid for it because it was temporarily a “hot stock” like Garden.com, or something else that is temporarily really expensive. It then declines down to that $50 level. Company X’s stock can go up 15% a year (outpacing the S&P 500 average, remember), but it will still take about twenty years at that pace for your shares of Company X to catch up to what they would have been worth if you’d just bought the S&P index fund. In fact, it will take you five years just to make your original money back.
Naturally, you want to avoid paying too much for those overpriced stocks. This does not always mean they are stocks of bad companies—just that they cost too much. One way, although certainly not the only way, of avoiding these stocks is by looking at their P/E (Price-to-Earnings) ratios. If a stock’s P/E ratio is really high, it means that the market values that stock very highly, and expects their earnings, or net profits, to rise in the future. Sometimes the market is right, but often, a stock price is 25, 50, 100, 1,000 times its earnings just because investors are excited about whatever the company is doing. Under Armour, Monster, and Amazon, which all have terrific products, are all trading at very high P/E ratios. Their prices are very, very high multiples of their earnings, as of this writing—way higher than the average of all companies in the S&P index. Obviously, the products offered by these companies are really cool and are bound to increase in popularity around the world—but it may also be that investors just want to own a piece of something cool. It’s natural to want to own a sliver of Monster Beverage Corporation, of course—it’s probably the most popular non-alcoholic/tobacco substance in the military. The question is: Is it worth buying the stock if it is really expensive? Remember, if the stock is trading at 50 times its earnings, that means for every $50 of stock you own, the company is only making $1.
Research has shown that over very long periods of time, it has been stocks with low P/E ratios that have tended to beat the S&P 500. Meanwhile, stocks with high P/E ratios have tended to lag the S&P 500. This does not mean that every low P/E stock will do well, and every high P/E stock will do poorly. But you will have a better chance at doing well in the long run if you focus on low P/E stocks rather than on high P/E stocks.
So just because a can of Monster keeps you awake on fire watch longer than a can of Coke doesn’t necessarily mean the company’s stock is a better deal. To better explore why low P/E stocks can make more sense than high P/E stocks, let’s look at the case of two imaginary nightclubs, both conveniently located right outside your base.
THE BOOMING BAR AND THE SMELLY SALOON
The Booming Bar, which is the first nightclub, is a thriving establishment. It was just built two years ago, and all the bars, booths, and fixtures are new. There’s a 2,000-square foot dance floor, 22 big-screen TVs playing every football game possible, 34 beers on tap, five-dollar pitcher Wednesdays, dollar-Bud Light Fridays, live bands every night, and Chuck Norris and Arnold Schwarzenegger are known to come by most weekends to party with the troops. Everybody goes there. The Booming Bar makes, after taxes, $1,000,000 in profits, every year.
The Smelly Saloon, on the other hand, is a broken-down shanty, right across the street from The Booming Bar. It was a pretty lively joint back in the late 1970’s, but the owner died in ’82 and now it’s managed by a couple of locals who sometimes forget to even open the place up for business. The stools are creaky, the lights are dim, and the live music consists of a drunk guy in the back who consistently yells karaoke into an imaginary microphone. The only beers available are Red Dog and Natural Ice. The Smelly Saloon makes, after taxes, $10,000 in profits, every year.
Right off the bat—which bar do you want to be a partial owner of? The obvious choice is The Booming Bar. You can tell all your friends that you’re a part-owner of that bar, you can probably hang out with Chuck and Arnold any time they come by, and you can look at everything that’s going on and say “I’m part of that.” The Smelly Saloon, of course, you don’t even want to go near, much less be a part-owner of. If both bars have stock shares, you want to buy The Booming Bar, right?
Let’s say, now, that The Booming Bar has a million shares outstanding (outstanding means shares that can be bought/sold by investors), and they are priced on the market at $100 apiece. The market, then, values The Booming Bar at $100 million dollars, which is a P/E ratio of 100 (remember, $100 million divided by the $1 million it makes every year).
The Smelly Saloon, on the other hand, has ten thousand shares outstanding. They are priced at $5 apiece. The market values The Smelly Saloon, then, at only $50,000, which means it’s P/E ratio is only 5 ($50,000 divided by the $10,000 annual profit).
Which is a better investment?
If you’re looking to invest in The Booming Bar for the sake of ownership pride, excitement, and the chance to see Arnold once in a while, you are likely to get all of those things—but you probably will not make very much money. After all, for every hundred dollars of stock you buy, The Booming Bar is only making you one dollar in profits. Even if it pays that entire profit out as a dividend, you’re only getting a 1% return on your investment.
The Smelly Saloon, however, is a different story. You probably don’t want to hang out there, but for every hundred dollars of stock you own, The Smelly Saloon makes you $20 in profit. If it also pays out all of it as a dividend, you’ll get a 20% return on your investment!
Now which one makes more sense—as an investment?
This is not a case that can totally apply to most investments. Every stock has a reason for being favored by investors, or for being avoided. The market, as a whole, is very unpredictable and usually very hard to understand. Again, this case is not supposed to say that low P/E ratio stocks are the only good investments, nor is it trying to prove that all low P/E ratio stocks are good to buy. It’s just an example for you to consider: When it comes to investing in companies, not all the glitters is gold.
When people think investing, images of stock charts and share prices immediately come to mind. However, there is a lot more to investing than just stocks. You do not have to pick out individual companies like Coca-Cola or The Smelly Saloon to invest in, nor do you even have to stick to just an S&P 500 index fund. There’s a whole world of bonds out there, which are a different kind of investment where you buy a $1,000 bond and then receive, for example, regular interest payments every six months for two, five, ten, 30 years…or more. As was mentioned long ago in this book, there are other things like real estate. Buying a house and then renting it out can be a good investment—one that can pay you “dividends” via rental income for years and years to come. Buying farmland acreage and renting it out to farmers is similar, and has some advantages. Nobody calls you up at 2 A.M. because your farm land’s water heater is broken and their soybeans cannot take a hot shower. Buying a small business can be very risky, but also very profitable—particularly if you buy it at a cheap price, like The Smelly Saloon. All said, owning something OTHER than just stocks can be a good idea, in line with the concept of diversification—your stocks may decline in value, and some companies may go out of business and stop paying you dividends, but other investments like real estate, etc., can be there to pick up the slack.
Most of these investments, though, take a lot more money up front to get started. You cannot put down $1,000 most of the time and buy a rental property, nor will a few hundred bucks get you more than an acre or two of tumbleweed in Eastern Wyoming. There are plenty of mutual funds out there that invest in these kinds of things, though, and through them, you can get a piece of the farmland action, or the gold mining industry, or the bond market, or whatever you want to sample—if you feel that it is a good investment. You can also buy mutual funds that invest overseas, particularly in “emerging markets,” i.e. countries that are not yet as economically advanced as the U.S., but are improving quickly and have a lot of growth potential. To get into more specifics, a financial adviser is almost always available and willing to discuss certain options available to you regarding your specific investment account.
This book is not meant to discuss investing only. We could no doubt go on for another four hundred pages, but will not, for two reasons. One reason is that you can go and read any of a thousand other books about investing and get plenty of knowledge and insight on how to invest—far more than can be given in these few chapters. One book that is highly recommended is The Intelligent Investor by Benjamin Graham. Warren Buffett said it is by far the greatest book on investing ever written. It is not an easy book to get through, especially if you have never read about investing before, but it covers a lot of general concepts that are very important to get a grasp on if you ever want to start investing in individual stocks, bonds, or anything else.
The other reason is that you should come away from this part of the book not so much with a highly precise and detailed knowledge of investing, but a general understanding of the possibilities it presents. There are a million ways to go about investing, and you should explore at least a few of them before you hop onto your brokerage account and click “BUY” on the screen. People try that all the time, and average it is not a good approach. Remember, you have worked really hard to save up that $1,000, so it’s worth your time to think about what you’re doing before you lay it on the line investing in something. As you learn more about these possibilities, you’ll not only gain that better understanding of what’s out there, but it will be easier to do something with your money other than just spending it all on stuff you do not need. The pie charts made an important point—you SHOULD spend money on stuff, and once in a while, spend money on things that are not really important. Do not blow it all, though, just to wake up one day and realize how much better off you could have been.
This book has made one general investing recommendation—that you at least consider investing some of your money in an S&P 500 index fund, specifically through monthly or semi-monthly Dollar-Cost Averaging. Stock picking is hard, and you will pay commissions and taxes. An index fund is easy, and with lower commissions and taxes. Again, an index fund is a composite basket of American companies—really, a major profile of the American economy. By investing in it, you are betting on the long-term health of America’s economic system. That seems like a reasonable bet.
Yet some people question the wisdom of this idea. While we have done really well over the past couple hundred years, people ask: Are we really going to stay successful? When you invest, especially in American companies or in an American stock index fund, you are betting on America. If you have most or all of your money in American investments, you are effectively “all in” on the U.S.A. Remember, though, that while investing yourself financially in America isn’t a smooth ride, you, the American military service member, don’t need to worry much about going All In.
You already are.
Do your research, learn what you can about investing, figure out a saving and spending plan, and decide how you are going to save and invest toward your long-term financial goals. You have got those goals, and you know how to work toward them—now it is up to you to do it. You have offered up your life in defense of America and the American economy. Let America give back to you.
YOU’VE EARNED IT.
This book was not easy to read, if you have made it this far. It was repetitive at times, and some of the vocabulary may have been new, but you have finished it, and hopefully you got something out of it.
A lot of the examples in this book were focused on junior enlisted personnel, particularly unmarried E-2 or E-3’s living in a barracks. Many enlisted military personnel live on ships, and this is not something that was well-incorporated into the book, but most of the financial outlines should apply to sailors as much as they do to Marines, soldiers, and airmen. Many military personnel are not junior enlisted, either, nor are they all single. Plenty of you have entirely separate financial issues that you must plan for, such as children and spouses, and this requires a very different approach, both to budgeting as well as saving and investing for the future.
Because of this, though, the baseline E-3 salary was used for projecting income. It was rounded to the nearest $100/month and did not include a number of allowances such as food allowance as well as clothing, in addition to some others, like BAH. If you have dependents, this salary baseline will not apply as much to you—both because you will make more money, and because you will have more expenses. I hope, though, that it will help you get a good sense of how to plan your own budget, and to create some solid plans for the future—both your dependents’ and your own.
In the end, though, this book is designed primarily for a single E-3. There are more E-3’s, particularly in the Marine Corps (my service branch), than any other rank. Most of them are single and live in the barracks, and since it is impossible to nail down any one single military profile, that one worked best. Lance Corporals (E-3 in the Marines) also make up the bulk of the participants in my financial planning seminar at our reserve unit. They contributed most of the Blowing Money stories, although at least one came from someone ranked much higher.
To all of them, and to all the rest of you, though, just a recap of the book…
Remember your goals. If you do not remember, start fresh and make some new ones. Consider them, debate them, and talk them over with others. A lot of them will not have anything to do with money…or so it would appear. Those that do concern your financial future, you should start planning for now. It is never too early to decide how you are going to pay for medical school and become a brain surgeon one day. It is never too early to start saving for a farm you want to own someday. It is never too early to plan out your dream business—whether it’s in Tulip Bulbs or Chuck Norris-endorsed bars.
Think about debt. If you have it, look at how much it is costing you just to be in it. If you are paying more than you really should be just to make interest payments, come up with a plan—quickly—as to how you will get that monkey off your back. The sooner you can, the better. It is far more fun to make monthly investments, rather than monthly credit card interest payments.
Consider your income. Some of you may not get the chance to make extra money through bonuses, deployments, etc., but if the moment does present itself, think about how you can turn that into a saving opportunity. It is always good to get ahead.
Think about “The Spectrum,” and see if you can come up with times in the past that you have blown money, speculated, spent, saved, and invested. Chances are, you have done all five. More importantly, the next time you are about to do anything with money, see if you can put your decision into one of those five baskets. It may go into more than one. Just think about it before you spend the money…if only for a moment.
Come up with a saving and spending plan. It does not have to be as detailed as the one in the Spending chapter, but if you can get a lot of your expenses into the plan, it will help you understand exactly how much you spend each month—and how much you are able to save. That plan was not all-inclusive. You are not going to save exactly $695 a month.
Remember the money-allocation, based on percentages. You do not have to stick to them—we do not all want to speculate with exactly 5% of our money, although that is the recommended maximum. You do not HAVE to blow 1% of your money on anything, either. Unless you have a serious need to spend $20 per month on stuff you have no use for, give it to someone who needs it. You will gain a satisfaction from that which far outweighs the crystallized resolution on your TV screen.
When it comes to investing, remember that the most important thing is not losing money. Over time, this is not terribly hard, but it usually requires a lot of discipline—through both regular investing as well as not checking your stock prices (if you own individual stocks) every ten seconds. If you let yourself get paralyzed by fear, you run the risk of buying a stock, then watching it decline by a tiny bit, then freaking out and selling it at a slight loss. You will never get anywhere that way. One lieutenant once bought $6,000 of Ford Motors stock, which at the time was the only investment he had. It went up, then went back down. He then changed his mind and sold the whole thing for approximately $18.31 more than he had bought it for. He’d literally moved two months’ salary in and out of one company in about twenty minutes, took on a ton of risk, and all he had to show for it was 41 cents. It would have been $18.31, but the brokers’ commissions were $17.90…98% of his total profit. It could have been a lot worse…or if he had stayed with it for a long time, perhaps been a lot better.
It is not easy to do all of these things, especially in the military. We face a lot of challenges that our civilian friends do not. We live in a really peculiar world that most non-military personnel, if not all, will never understand. The boredom, the loneliness sometimes, and most of all, the impulse to take action, creates an environment that is not naturally supportive of careful and well-thought-out spending. It is up to us to find ways around that. By understanding yourself and how your moods impact your personal financial decisions, you will understand better how to change these decisions in ways that will help you reach your long-term financial goals.
Finally, remember that you serve in the most honorable profession in America. You defend the political, economic, and social institutions on which this country rests. You deserve to prosper within them. You made a choice when you joined the military to serve in an occupation that requires constant selflessness, and without a doubt that will remain your top priority, but it is okay to focus on your own goals too, when you have the time. As you continue to serve, or as you finish your service, know that you deserve every bit of success and prosperity that comes your way.
You have earned it.
 Pierson, George, A Yale Book of Numbers: Historical Statistics of the College and University 1701-1976. (New Haven, Yale University Press, 1983), accessed March 14, 2015, http://oir.yale.edu/1701-1976-yale-book-numbers#F.
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Definitions of common statistics used in our analysis are available here (towards the bottom)