Recently, I stumbled on a resource that not only had fresh content but also took an honest look at financial issues facing the military, veterans and their families. That website is called Military Money Matters.
I did a little more digging and discovered the author was a young Army aviation officer named Jonathan Lee. His analysis was on point, and he offered a refreshingly different way of looking at military-related personal finance issues. Unlike many sites that hide behind anonymity, Jonathan is real about who he is (I actually found him on LinkedIn first!) – a fact I appreciate.
I reached out to let Jonathan know that I admired his approach. We corresponded for a while before it occurred to us that we should write something for the other’s audiences given our differing backgrounds. I asked Jonathan based on his experience, if he would capture the top mistakes he sees military members make with their finances. I couldn’t have come up with a better list.
A career as a military officer can be rewarding from both a professional and financial standpoint. From a professional standpoint, many find joy in the leadership experience, travel opportunities, and service to the nation afforded by the pursuit of a 20-year military career. While the professional development opportunities are unparalleled, many fail to take advantage of some of the financial opportunities afforded by the military. A 20-year career as an officer in the military with standard promotions adds up to over $1.6 million in base pay alone (based on 2020 pay charts). This does not include tax free allowances such as Basic Allowance for Housing (BAH), Cost of Living Allowance (COLA), and Basic Allowance for Subsistence (BAS). Many Officers make financial mistakes that prevent them from enjoying their lives even more as they grow older and approach retirement. I’ll take a look at a few of those mistakes today:
1. Not Investing Early Enough: Investing for retirement is not an old man’s game. It is something that every O-1 should be concerned with on the day that they commission. Beginning to invest at a young age is essential for future wealth. Assuming a return of 8% (Average for the S&P 500 over the course of history) an individual who invests $5,000 a year from age 25 to 35 will have over $183,000 more at age 60 than an individual who invests $5,000 a year from age 35 to 60. With the power of the blended retirement’s matching contributions and a commissioning age of 21 or 22, the difference becomes even more pronounced. Start investing the day you commission. You’ll thank yourself later.
2. Not taking advantage of the Career Starter Loan: The career starter loan varies depending on when and how you take it. For me personally, the loan was $36,000 at 0.75% interest over six years. That is less than half of the rate of inflation during that time period – a no brainer. While most officers take some form of the career starter loan, many don’t use it wisely. Buying a brand-new truck right off of the lot might seem tempting at the time, but investing that money is a much better deal. That truck you purchase will be worth less than half of what you paid for it in six years, but an investment in even a conservative index fund will return you at least 20%.
3. Not considering purchasing a home if the numbers look good: Real estate markets vary from location to location, but the 1% rule is generally a good thing to consider when purchasing a home. If the monthly rental income for the home you are considering purchasing is at least 1% of the home’s value, that home might be worth purchasing. Throwing away BAH on a rental or living on post is not always ideal (thought in certain situations it is warranted). You sacrifice hundreds of thousands in potential equity by the end of your career. Also, consider house hacks such as purchasing a duplex and renting out the other half or renting a room to a roommate. These methods enable you to take full advantage of your BAH and return a good portion of it to your bank account.
4. Not considering insurance alternatives: SGLI is great, but VGLI can be incredibly expensive when you separate from the military. When you retire or ETS, you still want to ensure that your family is covered in the event that you pass away but you don’t want to break the bank. Prior to an ETS or retirement, consider acquiring a “whole life” insurance policy before beginning medical evaluations for VA benefits. Doing so will likely save you money compared to a term policy or whole life policy purchased after the evaluation. Once you become medically disabled, life insurance rates increase dramatically.
5. Making Unwise purchases: Toys are great, but living beyond your means isn’t practical. If you find yourself living paycheck to paycheck, consider evaluating your budget and cut out the excess. Unwise purchases such as expensive cars, expensive boats, and luxury items add up quickly in the form of monthly payments. Putting that money towards more productive uses such as maximizing your Roth IRA or making home improvements proves much more beneficial to wealth generation
6. Not taking advantage of benefits: Many Officers fail to remain aware of all of the benefits that the military affords. Are you taking the GRE or GMAT for your Master’s degree? The military will pay for you to take each test once. Did your wife just pay to change her real estate license to the state you just PCS’d to? The military will contribute $1,000 towards that license. Remaining aware of the benefits afforded to you as an active duty service member saves you thousands of dollars over the course of time.
7. Not protecting Your property: Insurance…. insurance…insurance. You don’t know how good yours is until you need it. Know your policy’s deductible so that when the time come to use it, you don’t have to pay a large amount of pocket. Additionally, companies such as USAA have policies for high value items such as class rings, watches, and other jewelry. I personally know a guy who had his Rolex stolen while in Europe and his insurance paid for a new one. Ensuring that your valuables are insured proves incredibly beneficial… Accidents happen.
Jonathan Lee is a Captain in the United States Army Aviation branch and founder of Military Money Matters, an organization aimed at increasing financial literacy in the military. He is a graduate of the United States Military Academy with degrees in economics and operations research. In his spare time, he enjoys blogging about financial matters, investing in real estate, and reading.