As I mentioned before, I started this blog to help (military) people out.  Whether it is done by putting together various math problems, or to shed light on some items that are unknown to the average person, or anything else.  The problem I have been experiencing lately is that I forget that this is my own personal blog.  Although I will always look at different ways to have a purpose I stated in the first sentence, I must also realize that this is a way to keep me not only in check, but allowing me to write, brainstorm with myself, and to keep myself in check as well.  My wife has been bothering me about my (lack of) writing here and I kept rationalizing the reasons why without really thinking of it… excuses like:

Oh, I’ve been swamped at work all day and with the new health issues that have crept up, I do not have energy or desire to work on that today. 

Well, the weather is finally nice out, so I can take care of those neglected issues around the house like mowing the lawn.

We have been getting things dropped on us near-last minute every few weeks that change our plans for months ahead and you want me to think about writing?

I finally know what I want to talk about, but it’s just such a broad topic I start feeling overwhelmed with all the research and I just shut down.

Looking back at the last few weeks, I realize that it is exceedingly simple to fall into this way of thinking.  For me, it may be this blog and trying to maybe do too much.  For others, it may be finishing (or starting) their further education.  Doing something for their relationship (or lack of).  Perhaps going to the gym.  Of course, this also includes finances.

I talk to, and hear about, many people that are not “on track” for retirement.  (To clarify, I use the word “retirement” in this sense as a complete retirement from the work force, not just doing 20+ years in the military, getting a pension, but continuing to work elsewhere.)  They have squandered thousands of dollars into huge trucks, houses three sizes too large, boats, guns, Magic the Gathering cards, video games, and the list goes on and on and on.  They look back and realize their mistake, but they feel too “trapped” to do anything about it. 

A few years ago, I remember the “penny a day” challenge (where you save the amount of pennies amounted to the total days you are into the challenge) where you come out ~$677 ahead.  Then there was the “dollar a week” challenge where you start week one with $1, add $2 in week two, $3 in week three… you get it.  All of these demonstrate how things may look hopeless in the beginning (when you’re dealing with such tiny numbers), but the constant progress adds up to be much larger. 

Imagine doing the latter challenge with the change of $5/week?  Total addition of nearly $7,000 – in only one year! 

Although I will admit that someone who is struggling to stay afloat with bills may have difficulties with the last four weeks taking almost $1k, but you get my point.

As I will try to hold myself more accountable for posting content (if not for my readers, then at the very least for me), try to hold yourselves more accountable for continuing to progress financially.  Continuing with the examples made above, if your house is too large, maybe downsize and invest the profits.  If you have a huge 4×4 and you have went off-road (or used any of its capabilities) once or twice this year, maybe think about selling that and buying something more economical while renting a 4×4 for any trips that require it.  If you are unable to bring yourself to do so, maybe think about downgrading the 4×4 into an older, or slightly cheaper model?  I overheard someone talking about spending $500/mo on Magic cards at an appointment yesterday while his wife looks at it as permission to spend $500/mo on purses.  Maybe that $1K would be better put elsewhere monthly?  Maybe bring that down to 200/mo for each and save the $600?

One final statement on all this – do not take the above as “devoid your life of all pleasure”.  Just prioritize what is important to you – is it having toys that you rarely use outside of showing people that you seemingly “have it made”, or is it actually making it by having more time for your family or actual hobbies when you retire instead of slaving away at another desk/jobsite? 

-Art

As you may have read in the “about” section, I started this blog with the intent to EDUCATE.  I would like to dwell a little bit more on that, if I may.  What do I exactly mean by those words?  The dictionary defines “educate” as

How were they going to paying their rent?  Or their car payments?  Even groceries were brought up in some extreme cases.

MY “HOW” question was this:

How could they possibly BE in this situation?

I will be honest, I firmly believe that us military members (to include those that are enlisted) make plenty of money to AT MINIMUM have a decent life.  I will admit that you will not be able to have lobster and caviar multiple times a week for dinner, or take first class to your next all-inclusive trip to Fiji.  However, you should be able to put quality food on your table, drive a decent car, have some (expensive) hobbies, and overall enjoy life while still having the ability to save.

First, let us discuss our compensation.  I will use myself as an example in both my first and current base (and situations).

Since I was there from the rank of A1C (E3) throughout making SSgt (E5), I will use an average 2+ year E-4 pay – which is currently $2370.30, or ~$28,440 per year.  As I was a CA resident, I was not mandated to pay state taxes, but for the sake of this example, I will include them as it is only a $500 amount.

That $28,440/year adds up to $23,565/year AFTER taxes in strictly our base pay.

As a SrA I was able to move off base, which meant BAH!  My first duty station was in a relatively average-priced area, with BAH for a single SrA currently set at 960.  Since we are talking about our current scenarios, I will use this number for demonstration purposes (and it’s actually almost identical to what I was getting a few years ago).

With SINGLE BAH @ 960, that SrA is now making $35,085/year after taxes.

Add in BAS, and the amount is now $39,517.68.

Of course, my initial amount did not cover the deduction for SGLI at $5/mo, or if you lived in states with a higher tax responsibility.  For argument’s sake, we’ll just say an average E-4, in an average COL area, your take home is at $39K, or $3,250/mo.

I will not say that this is a huge amount of money, but it is absolutely huge for someone who typically has little to no formal training or higher education.

This amount though, is compounded further due to our (complete lack of) medical costs.  Not having to worry about buying suits or even business casual outfits you need to go to work in.  Having access to the commissary which has quite a few cheaper priced items than the regular supermarkets.  All of this adds up.

The average price of a 1 bedroom apartment at my first base was ~$700.  Some people spent more while some spent as low as $400 in slightly shadier areas of town.  Others got roommates and were able to save even more money.  However, I will stick with the average.

$700/mo in rent, with $50/mo average electricity costs and $30-50/mo for cable or DSL internet.  It was a common practice for the landlords to pay for both water and gas costs there, so I will not add them in.  In reality, even when I got my 3br/2ba house there prior to PCSing I paid maybe $20/mo in those costs – even while having a gas oven range!

Overall, a total of $800/mo, which brings our monthly total to $2,450.

Then of course, we need food!  Since many military people also enjoy a good helping of camaraderie, I will even say we need alcohol!  Beer, scotch, whatever floats your boat.  I love good craft beer and would drink at least one a day with my dinner or when I would go out, and a few more when I would go to get togethers and so on.  Overall, my budget for food and drinks never went above $600/mo to include restaurants and bars.  I would like to add a side note here and say that I ate WELL.  Steaks at least two times a week.  Huge helpings of various fresh veggies and grains.  Lots of fruit and berries… it was not an issue.

With that being said, we are now down to $1,850.

Well, what’s next.  We need a phone!  Gotta swipe right on something, no?  Multiple plans are available at walmart from $20/mo if your phone is unlocked.  I was still on my brother’s plan and we were (and still are) splitting it at $50/mo.  I’ll go ahead and keep the $50 figure.

$1,800 now.

Following shelter, food, and a phone – we have to have some transportation.  I will absolutely not play the game of “let’s go out an buy a brand new mustange at 20% APR” and instead will assume that if you are reading this and are actually trying to improve your situation, that you are sensible enough to, well… get something sensible.  I went a little beyond myself and ended up buying a 7 year old G35 for 10K.  I feel that there are a lot of cars in the 8-12K range that are not only acceptable, but even COOL to drive for new military members that will not cost an arm and a leg in repairs.

While I had great credit, I will use an average 7% interest rate (hint: you can get this lowered by using the SCRA with certain credit card companies and buying the car on a card!) over 36 months for a monthly payment of $309.

$1,491… getting a bit low now after our initial figure.

Especially since we have yet to add insurance and gas.

Average insurance cost for full coverage is ~$100/mo in my experience on said reasonable car.  I paid this amount with two accidents on my record in one of the highest insurance costing states.  (In comparison, that same insurance if I stayed in CA and had no accidents would cost about $140 over 6 months).

Add in a slightly longer than typical (for military) commute of 30 miles a day to include weekends and averaging a paltry 20MPG (because racecar) on $3 per gallon gas, you’re sitting at $135/mo for gas costs.

So, after insurance and gas, you would be at

$1,256/mo IN YOUR POCKET after ALL necessary expenses (that total ~$2K/mo).  Let’s subtract various maintenance costs of the vehicle and replacement of not only uniforms, but various home electronics and furniture… you should still be left with $1K/mo.

$1K in your pocket as a 2 year E4 while still eating and drinking extremely well, driving a car you won’t be ashamed to pick up your latest “Netflix and chill” date in, and living in a decent apartment with decent furnishings.

Even if you are stuck living in the dorms and not “profiting” off a whopping 160/mo in excess BAH as I used in my example, you would still be able to save over $800/mo – although this would likely even out with our off-base member since a dorm rat’s food costs should be lower by using a meal card.

Then you add in basic training and tech school, where you should have saved some money.  The previous years of living in the dorms… All of these things should increase your monthly take-home even more, as you would have already bought your electronics as needed and saved a sizeable sum for a downpayment of a vehicle and thus reducing your payments.

I will add a caveat here that those that are single parents with kids will likely get a bit screwed and will need to adjust those numbers just to scrape by.  While you will get more in BAH, you may also need to pay for childcare and your child’s necessities, even if you decide to continue with a 1BR place.  For those that have a spouse AND a kid, your overall situation should not be as significantly impacted as you will either have a SAHM/D, or extra income to absorb that cost.  You can easily feed and clothe your child for $300/mo on the higher end – and I have seen family members and friends do just that.  Of course, the more kids you have, the more difficult it becomes and as I just stated, you will need to prioritize certain expenses over others to keep up some kind of savings.

Back to the topic though, saving $800-$1000 should easily be attainable for the majority of E-4s our there.  If you missed my personal numbers, you can find a generality of them in my post about my New Year goals here.

So what, then, should you do with all those moneys?

Well, here is where I rant about Dave Ramsey…

If you are unaware of the name, Dave calls himself “America’s trusted voice on money and business”.  He has a third largest/most popular talk radio show and has written books as well as held various seminars.

While I do not dislike him as a person, or as an educator in his own right, I have an issue with people that parrot his advice as gospel without really tailoring it to personal situations.  This seems to be common in the military, likely due to his popularity and the military as a whole largely having issues with money and money education.

His 7 pillars – or “baby steps”  – are as follows:

• Baby Step 1 – $1,000 to start an Emergency Fund
• Baby Step 2 – Pay off all debt using the Debt Snowball
• Baby Step 3 – 3 to 6 months of expenses in savings
• Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
• Baby Step 5 – College funding for children
• Baby Step 6 – Pay off home early
• Baby Step 7 – Build wealth and give!

I’m going to address steps 1 & 3 together here.  Starting an emergency fund is not a BAD thing.  However, you need to be aware what an emergency fund is FOR.  You also need to be aware that everyone’s emergency fund SHOULD be different.  I am not only talking about that E7 with three kids and four new cars having a different amount than an E3 who does not have any commitmets and drives a Civic.  I am talking about the SPECIFIC emergencies that one should save for.  A person who drives a Civic will need to account for far less in an emergency repair than someone who drives a new BMW for example.  A person who rents will not need an emergency fund to replace the AC or the roof, as another.

Most importantly, an emergency fund is primarily marketed as “6 months of expenses” because most people have very limited job security.  Last I checked, aside from doing something egregiously stupid (i.e. DUI, sexual harrasment/assault), our jobs in the military are quite secure.  Having a 6 month $15K emergency fund as a single 20 year old E-4 does not make sense when you can use that money to significantly help yourself via compounding interest in the investing world.

Now keep in mind that you should have some means to take care of an emergency ASAP.  I would advocate that one should save enough to fly home and maybe a few days of hotel/food if necessary.  If you have a travel credit card and have enough points to do so for a flight out tomorrow, that is something that can decrease your actual emergency fund – assuming you do not waste those miles to a flight elsewhere!  Also, save enough to cover MAJOR car repairs at once (i.e. radiator starts to leak while your tire blows out and the transmission is acting funny).

My personal thoughts on an emergency fund?  $5K should do the job for younger, single folks.  Of course, the more responsibilities you have, the higher it should be.

So… step 2 – Pay off all debt using the Debt Snowball.

I 100% disagree with this statement.  All debt is NOT bad.  Debt is a TOOL.  Without debt, the entire world economy will crash and burn in seconds.  Debt is essentially creating money where there isn’t any.  Dave’s advice to avoid debt is often linked to Proverbs 22:7 (as he is an evangelical Christian) which states “The rich rule over the poor, and the borrower is slave to the lender.”  While I admire his conviction and faith, a bible verse is not a substitute for logic in financial matters.

0% APR debt is literally FREE money.  This is because the average inflation for the last couple years has been 2%.  The AVERAGE rate of US inflation is 3% each year.  This is the reason that people advise others not to pay off sub 4% loans, as the interest is usually tax deductable and makes it an even wash (or even lets the borrower come out ahead).  Also, because $1,000 in a market that on average returns 7% post inflation (a whopping 21%+ the last year) is better than getting a return of 1-2% after inflation on said low APR debt.

Please do not take this to mean “acquire as much 0% APR debts as possible and dump it in the stock market”, because you never do know what can happen.  I toyed with the idea of getting a cash advance on my $0 fee/0% APR credit card prior to my PCS.  I am glad I waited though, because I ended up getting screwed over by my losing base and I ended up spending almost $10K that I should not have had to.  Shortly after I paid that expense off, they sent a letter saying they will no longer honor the 0% APR, so please, PLEASE be responsible with the debt you might accrue.

Aside from that, you have houses – how many people buy houses in cash?  Not many!  Landlords purchase homes where they’re making hundreds of dollars over the mortgage payment.  My 2nd home’s mortgage is $700 for example, but my rent is $1,200/mo.  After tax deductions, the loan is something I am 100% comfortable in keeping and trying to get as many more as I can afford ASAP before they raise the interest rates up higher!  Businesses get debt from the banks and government so they can take advantage of getting new tools NOW and pay for it with those tools’ profits LATER.  Why would you not do the same?

Again – absolutely stupid advice.

I will say that if you DO have debts over 4%, pay them off ASAP.  And don’t do the debt snowball method of paying off the smaller ones first either. Prioritize your high APR debts over anything else.

Step 4 – Great, if you don’t have a pension or would like to work until social security age.  I would rather retire early, which means a much more aggressive savings rate.  Even with a pension, I’m aiming for a higher cost of living than it would provide.  I personally aim for at least 30% of my income.

Step 5 – Interesting topic for military folks with our GI bill.  You can split it for your kids or spouse if you plan on making military a career.  It is not too difficult to get a degree using TA at nearby physical schools, or even online schools (do not go to for-profit colleges), and keep the GI bill for your dependents down the line severely cutting costs in the future.

Additionally, my personal thought is that while I want to assist my children in education costs if they need it, I will not be funding 100% of their college experience or anything close to that.

Step 6 – see step 3.  Stupid, stupid, stupid.

Step 7 – Great, build wealth for sure.  However, if you follow some of these steps, it is actively hindering your ability to build wealth vs someone who is being more logical in their methods.  As far as giving, do what is comfortable.  I support a few charities and make donations to causes that I believe in.  For some people, they want to give hundreds of dollars monthly, for others, it’s a few bucks a year.  Do what you are comfortable with and remember to be humble and realize how lucky you are in your position.

Here are MY 7 steps:

1. Pay off all debt that is over 4% APR ASAP, starting from the highest interest.
2. Pay off all revolving debt (i.e. your credit card) every month.
3. Put 10% at minimum into your Roth TSP whether you are doing the blended retirement system or not.  If you are planning on getting out, make sure you have a few hundred in your traditional TSP account so you can roll over future 401k’s into the TSP to take advantage of the low expense rates of the funds.
4. Depending on when you joined, try to fully fund your Roth IRA ASAP for the year.  This is currently $5,500.  A Roth IRA is more flexible than a Roth TSP and offers more investment fund choices.  Many companies (like Vanguard or Schwab to name a couple) offer similarly priced offerings as the TSP if you want to follow that fund route as well.  Since you can only invest that amount every year, it is important to fund it before tax day.
5. Emergency fund of at least $5K or fast access to funds that are at least $5K.  This can include high limit 0-4% APR credit cards that you should be able to pay off in a month or two, or say… talking to your parents to give you an interest free loan if needed.  Do not overload yourself with huge credit card debt just because it is a low APR.  Pay. That. Shit. Off.  See steps 1 & 2.

   * As a special note, I am completely fine with people using low interest credit cards as emergency funds for specific instances like the government shutdown.  If you are not living paycheck to paycheck, it is extremely reasonable to realize that the government will not shut down for month, or a year.  If you are able to put that 2.2k of living expenses I wrote about above  on a 4% APR card, it is likely that when the goverment reopens and you get your pay, it will not even be the end of the billing period.

6. Set aside 5% or so of your paycheck for future purchases.  Things like a new TV, phone, etc.  Do not use your emergency fund in lieue or in addition to these funds to buy something that you want.  Try to exercise discipline and not add more just to buy something “faster”.  There are some exceptions to this such as very specific items during black friday that won’t see those kinds of prices for another year, or something that is limited edition coming up that you might really want.
7. Kind of a two choiced program.  If your living expenses have increased due to a new car, or house, or even spouse/kids, add more into your emergency fund.  If your emergency fund is good, figure out what you want to invest in and tailor the rest of your excess moneys into it.  Want a “lazy” portfolio?  Add more and more into the TSP until you are practically living “paycheck to paycheck” after your TSP contributions – assuming you have a healthy emergency fund built up!  Want to invest into real estate?  Start putting that excess money into CDs or just in a savings account to purchase your property.

   Do NOT just throw it into a savings account with no plan because you WILL lose money due to inflation.

As always, feel free to shout out if you have any questions or want to discuss some of these things further!

-Art

Thankfully, I have been on vacation since NYE until now.  I didn’t take any laptops.  I turned off my e-mail notifications on my phone.  I uninstalled Facebook.  I didn’t even answer the phone.  All I used was my Uber app and Google Maps to get around and some mobile games to fill up time as needed.  I wanted a minimally intrusive vacation (for once) and ended up with some incredible travel memories without any stress from “the real world”.

My wife, however, was not as willing to let some technology go and spent some time on Facebook, which brought up the topic of resolutions during our trip.  Resolutions are a “touchy” subject for me.  

Normally, I loathe the phrase “NEW YEAR’S RESOLUTION”.

I feel that if you want to change something, you don’t need to wait until 1 January to start making those adjustments.  Start NOW.  However, I realize that not everyone feels that way and likes to have the slate “wiped clean” so to speak, before they start.

As always, what works for me may not work for you.  With that being said, instead of having resolutions specifically for the new year, I like to take some time envisioning what I am doing that year to achieve my ultimate goals.  Since most people read this for financial related musings, I will address that specific subject.

Main goal: Financial Independence/Retire Early (FIRE)

Sub goal: Achieve 100k annual income through investments and pension

The following are the steps I hope to take this year to contribute to the above:

1. Continue with 10% TSP contributions.
2. Max ROTH IRAs for myself and the wife.
3. Save enough to purchase an additional investment property to rent out (~25k on a purchase price of 120k).
4. After the above is met, raise TSP to 30% or more.

Things that are preventing me from achieving the above:

1. School costs.  My wife is going back to school as she is unable to work at our location.  Paying for college classes themselves, textbooks, misc supplies, and even potentially a new laptop – if necessary – is going to result in thousands of dollars of bills.
2. Travel.  We are stationed overseas, which means there is a plethora of options to travel, if we would like to.  Spoiler alert: we like to.  Our anniversary is coming up this spring and the plan is to take a week or so and have another amazing vacation.  Additionally, potentially going back to The States to visit family/friends as well as smaller scale (weekend) trips.  All in all, I would guess this will cost us another ~$5,000 for the year.
3. Gadgets/home stuff.  I’ve had the same camera for over 6 years.  I’ve outgrown its limited options and yearn for something better.  Because of our frequent traveling, I also want something that’s a bit more rugged and weatherproof.  Additionally, capturing these moments is important to me, so I want something a bit better than the regular consumer.  I’m shooting for a D850 before our big trip within 4 months.  After the body and lenses, that will probably be another ~$5,000.  My phone is also going haywire.  I’ll be waiting for Black Friday deals on that, but even still – that’s another $2-300.  The wife needs a few things for the house and would also like a Fitbit.  Add in some video games for me and we’re looking at about $1K for all that too…Yikes!
4. Misc emergencies.  Our second car is currently in the shop with a brake job.  I’d love to do it myself, but I don’t have the tools or the space at our house.  While I wouldn’t mind going to the auto shop on base, I haven’t done brakes in over a decade and it’s a bit more of an advanced job as I also need to replace the front caliper.  I don’t trust myself to finish within a day or two, and because we’re in a foreign country, I have no idea who to call in case things take a turn for the worst and the car becomes un-drivable.  I’m guessing $600 for parts and labor.  Things like that always add up – and it sucks!

Things that are helping me achieve the above:

1. Being overseas.  COLA is incredible.  So is the OHA/utility allowance.  While I can’t keep my unused rent money, I do keep all of the utility funds I don’t use.  This means we generally use thick blankets and walk around our house in sweatshirts to keep heating costs down, as an example.  There are folks who have spouses or kids at home and keep their houses at 70+ degrees 24/7.  They also get hit with a monthly gas bill of $800.  To me, that is unreal.  On the flip side, we pay about 2k/year in our gas costs.
2. Rent income.  While this doesn’t play into my goals this year (as my rent costs are just slightly higher than the mortgage – and I use the extra as my maintenance fund), it does greatly help with my main/sub goal.  A third house will further snowball things for me down the line and give me a little more diversification in case one is vacant for a few months.
3. Cryptocurrency.  Instead of buying the D850 camera upon return from deployment, I put a few thousand dollars into various coins.  I’m fortunate to say that my initial investment has been quadrupled within 4 months.  While half of that money has been converted back into dollars, the other half is still fluctuating daily with hopes of new highs.  I’m still debating if I want to jump back in or not, but with various stop losses for my coins, I will still be in the black if I choose to do so.
4. My wife’s accident.  While visiting the states, my wife was involved in a hit and run.  There were witnesses and one managed to take a picture of the offender’s license plate.  She had some injuries because of it and reached out to a lawyer.  We are looking at collecting anywhere from $5-15,000 right now, and significantly more if the doctor agrees to sign a statement that her additional issues are likely stemming from the accident (which to us seems very obvious, but apparently some military doctors don’t like signing anything to that extent). 
5. Basic budgeting.  While we don’t have a strict budget, we do adhere strictly to the golden rule of “don’t spend more than you earn“.  With that said, all of our living expenses (home, car insurance, gas, utilities, food) total at most $2,500.  My current monthly take home pay is in the $5-5,500 range.  If we are able to save $3k/mo (or $36,000 for the year) that covers the house and IRAs.  Hopefully, the speculative investments I have made continue to perform well and the wife’s school is cheaper than we believe it will be!

So there you have it.  My continued financial goals for the year.  Hopefully, you are able to better your financial future this coming year as well!  Just like the gym, everyone has to start somewhere.  Just because you are not able to save 3K/mo, or even $300/mo does not mean you should give up.  I started my career 7 years ago with a NW of negative $10-15K and even after blowing my first year’s paychecks on nonsense, I have crossed over the $100K mark in assets a few months ago.

As always, please feel free to reach out if you have any questions and have a kick-ass 2018!

– Art

The following post comes from a new contributor to the website – Alex.  You can find out more about him in the about section  I’m excited that this website has reached multiple people in such a short time that have volunteered their time and knowledge on financial subjects!

So you have done the math and after looking at all the hidden costs that was mentioned in our previous post, you decided that it is indeed a good idea to purchase a home so you can build equity and lay down roots in a community.  In this post, we’ll talk about various financing options and closing costs that may be applicable so you have as much knowledge as possible to becoming a home buyer.  We will be focusing specifically on the VA loan throughout the discussion.

Your average American citizen usually has a couple of options when getting a home mortgage loan: they can put a large down payment on the home (usually 20% of the purchase price) and finance the rest of it at a normal rate, or they can do a low/no down payment option which results usually in a higher rate and something called PMI.

What’s PMI? PMI stands for Private Mortgage Insurance.  Whenever you get a mortgage from a lender and put less than 20% down, they are essentially taking on the risk of you not being able to pay the full agreed upon amount and foreclosing on the house.  Although this insurance is for the lender’s benefit, they build this into their models and rates that you will end up paying.   PMI rates can range from around .3% to 1.5% of a mortgage’s value. This leads to a higher monthly payment that does NOT help you build equity in any way — it just gets paid to the bank to help subsidize the risk of foreclosure. While this can go away later on once you have built your equity to 20% or above, keep in mind that not only does it not go away automatically, but by the time it does, you could have paid thousands in unnecessary payments.  Another important thing to note is that it is not possible to get rid of this insurance if you have a FHA loan.

One of the major differences between VA loans and various other loans is that VA loans have no PMI, regardless of how much or how little of a down payment is made.  This is because the VA itself subsidizes these loans and takes on the risk of nonpayment, allowing veterans and service members to save a lot of money if they don’t have a significant amount saved for a down payment.

 “But wait, if there’s no PMI then what’s the point of making a down payment at all with a VA loan?”

While it is true that a traditional down payment is not required, everyone who borrows for a home via a VA loan is required to pay something called a “funding fee” (with the exception of veterans and service members who are receiving disability compensation).  That aside, the VA loan funding fees are broken up as follows:

There are few things to note about the funding fees.  First, these funding fees may be rolled into the mortgage if desired, allowing you to further lower the upfront cost of purchasing your new home and instead paying it off over the lifetime of the loan.  Next, you’ll notice that the subsequent usages of the VA loan only increase your funding fee if you are making NO down payment – as such, if you’re going to purchase more than one home using the VA loan, it makes a lot of sense to have at least a 5% down payment ready to go.

For those that don’t know, the VA has a few stipulations in order to gain a mortgage through them: You must have served 181+ days in peacetime/90+ days in wartime/6 years in the Guard or Reserve, reside in the home as a primary resident, and  must not have been discharged under dishonorable conditions. If you meet these conditions, you’re eligible for the VA loan, up to the maximum entitlement of $424,100 or specifically, $106,025 in actual entitlements – This isn’t the actual loan amount, but rather how much the VA will guarantee for you.  Remember earlier how we mentioned PMI and risk to the bank? The reason VA loan rates tend to be lower and there’s no need for PMI is that the VA actually usually guarantees 25% of your loan amount.

Here’s how the math works: Say you purchase that $200,000 home and use the VA loan, while meeting all of the requirements.  You then PCS a few years later and want to buy a home at your new location as well while renting out your old home rather than selling it.

$424,100 x 25% = $106,025 maximum entitlement

$200,000 x 25% = $50,000 used entitlement on first home

$106,025 – $50,000 = $56,025 entitlement remaining

$56,025 x 4 = $224,100 actual home purchasing power remaining

Alternatively, you can just subtract the purchase price of your home from $424,100 to find what’s remaining, but I find it can help to understand the underlying principles.

Now that we understand the specifics of the VA loan system, it’s time to start looking at getting that mortgage! Besides the FHA/conventional/VA types of loans, there are also two major subtypes of mortgages: fixed and adjustable-rate. Generally, when we’re talking about fixed, we’re talking about 15 year and 30 year mortgages (although there are other timelines available), while with an adjustable rate (generally referred to as an ARM) we’ll talk about something called a “5/1 hybrid ARM” as an example.

A fixed rate mortgage is just that: a mortgage with a fixed rate! Your monthly payments will never increase, nor decrease without refinancing on a fixed rate mortgage. This can be a major benefit, as you know exactly what your monthly mortgage is going to be for the next 15/30 years (barring major changes in taxes or homeowner’s insurance). When you choose a fixed rate mortgage, you are provided an interest rate, which is generally higher the longer the term of the loan. This is because as time goes on, interest rates will change, and the mortgage provider is hedging their bets and lowering their risk by providing you with a slightly higher, guaranteed price over the next 15 or 30 years.

On the flip side of this, we have ARMs (the Adjustable Rate Mortgages) – these can fluctuate from year to year, based on the current interest rate. The numbers in front of it refer to how often these rates can be changed – in our 5/1 example, the 5 means you’ll have 5 years before your rate is eligible to change at all, and the 1 means that your rate will be eligible for change every year after that. For VA loans, your rate can only increase by 1% a year, and up to 5% over the lifetime of the loan.  While they often have slightly lower rates, they make up for it as the loan matures and your mortgage payment can increase year to year and cause financial hardship. The benefit is that you can often get a lower rate compared to a fixed rate mortgage, since the bank isn’t taking on as much risk – they can just raise your rates later on if interest rates go up.

As an example, let’s look again at that median $200,000 home and assume you got a 5/1 ARM on it with a 3% interest rate.  This would mean you have a monthly payment of $843. For 5 years, your payment would continue to be the same, but in the 6th year, your interest rate goes up by 1% increasing your monthly payment to $954. The next year, it could increase again by another 1% to 5% total, this time increasing your monthly payment to $1,073 and so on and so forth… In this example, the highest it could cap is at 8%, or a whopping $1,467 monthly payment – a hefty increase from our start of $843! While this exact scenario isn’t very likely, it’s definitely possible, and it’s a major reason why most people don’t recommend pursuing an ARM unless you know you’re going to be living in a house less than the amount of time you’ll have the fixed interest rate – in which case you should just consider renting as our calculations showed before.

One final point to think about when looking at a mortgage is just that– points! A “point” in this context is a way for you to essentially prepay part of the interest on your mortgage loan, which mortgage providers will reward you for with a lowered interest rate. You can also have negative points, where you can receive money during closing towards costs but will result in a higher interest rate. These points are tax deductible, and lenders generally allow anywhere from 0 points to 3-4 points on a loan. This will vary from lender to lender, and the benefits of doing so can also fluctuate, so be sure to shop around!

As an example, we’ll go back to our loan from earlier for $200,000. Each point is equal to 1% of the loan amount; so 1 or 2 points would be equal to $2,000 or $4,000 respectively. Say that your loan provider offers a 0 point loan at 4%, a 1 point loan at 3.5%, and a 2 point loan at 3.25%. The 0 point loan would have a monthly payment of $955, the 1 point loan would cost $898 a month, and the 2 points would lower the cost to $870 each month.

0 Points: $955 per month

1 Point: $898 per month ($2,000 paid) = $57 saved per month – 35 months to break even

2 Points: $870 per month ($4,000) paid = $85 saved per month – 47 months to break even

Any time you’re looking at a mortgage where they offer points, it’s worth doing the math and finding the exact break-even point and comparing that with how long you expect to live in (or make payments on) the house – in this case, the 1 point may make sense if you plan to live in the house for more than 3 years. As with any major purchase decision, make sure you’re doing the math for yourself and comparing your options and shopping around!

In this post, we covered the differences between conventional mortgages and those backed by the VA, how PMI works, VA loan funding fees and down payments, VA loan minimum requirements and maximum entitlements, fixed rate and adjustable rate mortgages, and finally points and how they affect your mortgage. Hopefully you learned a lot about the math and decision making behind a home purchase; in our next post, we’ll look at more of what to expect during the loan and home purchasing process!

Sources:
http://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx
https://www.veteransunited.com/valoans/va-arm/
https://www.benefits.va.gov/homeloans/documents/docs/funding_fee_table.pdf

(This is part 1 of a multi series of upcoming posts about home ownership, VA loans, and how to profit while utilizing the benefits we get.)

As my rotation in this deployed location comes to an end, more and more I hear discussions about what people are going to do with their money.  Some are taking trips, some are buying new vehicles, and many are talking about home ownership.  When pressed on why they want a house in particular, the majority of them have the same answer.

“I am sick of wasting money on rent.”

Let me make one thing perfectly clear before we start any analysis with math, or hypothetical numbers.  Renting is NOT throwing away money.  Renting gives us the freedom, especially as military members, to walk away from one property to the other during PCS season, deployments, when our family size changes, or for whatever other reason.  It gives us the ability to not have a second thought about that AC breaking or how we will pay for the new water heater.  These things are especially important while we are thousands of miles away and are without the ability to make phone calls or even send e-mails.  Additionally, it gives us a chance to pack up the place and put everything into storage while banking that sweet, sweet BAH during a deployment.  Say it with me now.  Renting is NOT a waste of money.

“But look, the landlord is getting rich off of my BAH, I could be the one getting rich off of my own BAH!”

Come to a full stop there.  Owning a house is a risk just like any other investment.  Unlike the majority of other investments, it may be the LEAST liquid.  (Liquidity, in this sense, is used to describe how easy it is to convert an asset into cash.)  Additionally, you have to worry about things like vacancies, depreciation, buying/selling fees, and of course – maintenance.  

Now that that is out of the way, let’s look at some average numbers.

The median home in the US that is being bought/sold is $200,000 (as of June 2017) according to Zillow.  Of course, that number will ultimately depend on the size of the house and possibly more importantly location as well as some other factors such as the materials used and so on.  Since people are stationed from Travis/Los Angeles/Seattle/other HCOL areas to middle of nowhere LCOL places as well, this is the number I will use for the hypothetical situations I will calculate out.  $200,000 will cost you a VA funding fee of $4,300 if it is your first loan that is usually rolled into your mortgage.  In addition to the cost of the house, you will be responsible for paying property taxes and insurance.  They will typically be 1.2% of the home’s cost and .35% respectively.  A 30 year mortgage with great (720+) credit using today’s rate of 3.875 (or 4.047 APR) will ultimately cost you $1,219/month.  

Keep in mind that this will lock you in for 30 years (or until you ultimately determine to sell the property).  Additionally, taxes often go up and very rarely do they go down.  Insurance prices will also typically increase from time to time.  While these prices will not be significant, it is something to consider.

Additionally, (nearly) everything in that house is now your responsibility.  Please do not think that a home warranty will cover everything, either.  Home warranties exist to make money.  They will nickel and dime you as much as possible and will fight you about a replacement, even if it makes more sense to do that vs yet another patchwork repair.  So let’s bring up some of the recurring things you’ll need to fix.

1. Roof – possibly the most expensive regular item you will have to consider. Homeadvisor.com lists an average national roof replacement price of $7,164.  Warranties for most roof expire at 10 years, but they usually last for about 20 years.  That’s an additional extra total expense of $29.85/mo

2. AC – another pricy and regular item that needs repairs and replacements.  An AC usually lasts for about 15 years, although after the 10 year mark it may make more sense to get a replacement over a repair.  Average price is $5,230 using homeadvisor statistics.  Using the 15 year mark, that’s another $29.06/mo

3. Furnace – Using the same website to be consistent, their average price is $4,180.  Many AC techs will advocate for a furnace replacement at the same time as the AC.  However, the newer furnaces can last from 15-25 years, so I will use 20 years for this purpose.  This expense will add an additional $17.42/mo

4. Water heater – depending on what kind you get, this has a big difference as well.  A tanked water heater runs approximately $1,000.  A tankless is approximately $3,000.  Tanked water heaters last 10 years on average while tankless ones last for 20+.  The price per month then becomes $8.34/mo or $12.50/mo.  

5. Windows – Windows will typically be rated for 10-20 years.  Because windows are usually an afterthought for most people and do not get replaced until absolutely necessary, we’ll use the 20 year number for this.  Adjust your price accordingly.  An average window replacement house across the US is $5,011 or $20.88/mo

6. Flooring – this will likely have the biggest variance due to the greatest amount of choices on materials.  Carpet will need replacement more often.  Vinyl/Linoleum slightly less so.  Hardwood and tile will be the most resilient.  

1. Carpet – national average of $1,586.  California law dictates that carpet’s useful life is 8-10 years.  At 10 years replacement, the cost is $13.22/mo.  This does not include carpet cleaning in the meantime.

2. Vinyl/linoleum – vinyl lasts from anywhere between 10-20 years.  Linoleum lasts from 20-40.  Since most people care relatively little about their flooring unless there are serious issues with it, I’ll use the max time for both.  Their costs are similar and the national average for this replacement job is $1,362.  The monthly cost then breaks down to $5.68/mo and $2.34/mo respectively.

3. Hardwood flooring – Average price for this is $4,404.  The life expectancy really depends from 20-30 years for engineered wood or potentially the lifetime of the house with real wood, if properly taken care of.   Using a 30 years replacement figure (or maybe first install), this will cost you $12.23/mo

7. Appliances – your washer and drier, fridge, microwave, oven and the like will all need to be replaced with similar life expectancies of about 10 years.  After personally shopping for the above, I think $2,000 is a fair low range average.  This brings the average extra monthly cost to $16.67/mo.

8. Misc expenses – While truly unquantifiable, you need to consider things like sink fixtures, bathtubs, toilets, lawn care, interior and exterior paint, the occasional plumber/electrician/HVAC tech calls and the like.

Not counting item 8, this brings your previous $1219/mo to at least $1,343.56 if you use the low ranges of those replacements.  Going with higher ranges/quality items will increase that figure proportionally.  Do you know how much you pay for the above while renting?  In most cases – NOTHING!

Of course some areas are very obviously tilted towards owning almost no matter what the other circumstance are, but those areas are getting more difficult to find since investors will be looking to buy out those locations to rent out.  

Not counting those outliers, assuming you are ok with the above because you believe you are “building equity” and “paying yourself”, you have to consider what happens once you PCS.  Because you put 0% down, you have no equity in the house to start off.  The overwhelming amount of your payment will go into interest rather than the principal amount borrowed.  While you did not have to pay any kind of commissions while buying, you will likely have to pay them while selling.  The total average commission is 6% (3% to buying/selling agent) which amounts to $12,000 when selling that $200,000 house.  $12,000 will take you over 3 years – or 39 months to be exact – to reach if you are lucky enough to qualify for that 4.067% APR.  Still think renting is a waste of money?

Keep in mind that that those 39 months are for you to walk away from the house purchase with $0 to your name, even though you have spent at least $47,541 without counting ANY replacement/maintenance fees ($1,219/mo).  Unfortunately, I was unable to find any data on today’s statistics, but according to an article on militarytimes.com(1) from September 2015, the military moves at least half of its service members anywhere between 32-38 months.  Of course there are outliers, but this is strictly the average.  As you can see, that time frame is a bit lower than the 39 months you’d need to break even on that house purchase.  You also need to account for the time to sell.  While some housing markets close within a week of making the house available for showing, others take weeks and even months.  My first house, for example, was on the market for almost a year while the owner (a captain) continued to pay mortgage for an empty place throughout that time period.  Talk about throwing money away!

Of course, it is not all doom and gloom about home ownership.  Like I said before, you get nearly complete control of whatever you want to do with your place, which you can’t put a price on.  You also have a unique situation of buying a home without having to save tens of thousands of dollars or pay for Property Mortgage Insurance (PMI) and, given proper research, can turn it into a successful investment.  In the near future, I will be going more in depth over real estate investing and how the VA loan can be used to help.

The bottom line is that while ownership is far more expensive than it seems, it can indeed be more beneficial to renting, especially in areas where the rents are vastly over priced in comparison to the home of the houses.  It’s up to you to do the research necessary to see whether that is the case or not around the location you are at.  I am hoping that this will encourage folks to do that research instead of just jumping on the propagated train of thought that “renting is a waste of money”.

If you have rationally decided that purchasing a house is the best plan of action for you, I will be tackling what exactly the VA process entails and some of the issues you may face while going through the home buying experiences in the next post.

1. https://www.militarytimes.com/2015/09/12/pcs-costs-rising-across-the-force-even-as-moves-decline/

2. The reason why most averages are from homeadvisor.com is due to the direct responses of various members.  This seems to make sense to get averages from as all responses are based on multiple thousands of data points.

Credit (and credit cards – which I will tackle with the next post) related questions are rather popular in the military.  Many people that enlist or even commission never get told the details about credit scores and why it is better to have a good score.  We all know or at least heard of someone that buys a car out of tech school with 15-20% interest rate and is always short on cash.  Well, to prevent that from happening, having a good credit score is essential.   Hopefully this post sheds some light on the various basic questions about it.

So what is a credit score?

A credit score is a number that is based on a combination of various financial factors.  It is the most important thing when it comes to interest rates on auto, home, personal and any other kind of loans.  The most common credit score that is used is known as the “FICO” score (http://www.myfico.com/).  While this will be geared towards that particular score, you can apply the same fundamentals towards any other credit score aggregates.  Essentially, a credit score rates your “trustworthiness” to pay off debts.  The higher the score, the more you have demonstrated to not be a liability to lenders.  The FICO score ranges from 300-850.

Think of it this way – if two of your friends or coworkers came by and asked you for some money and you know that one is very responsible with finances, but he just had an emergency while the other is constantly asking people to borrow funds for daily expenses, cancels various plans because he can’t afford them, or even gets his car repossessed for missing payments, who would you rather loan that money to?  My guess is that you would pick person #1.  This is exactly what the credit score figures out.

Why is a credit score important?

A credit score ultimately governs most things in our adult lives that have to do with money.  You want car insurance?  Having a good credit score can (and usually will) decrease your premiums.  You want a loan on that cool new car?  A better credit score will lower your interest and save you money.  Home loan?  Credit score will determine your interest rate there as well – which will have an impact on the overall amount that you can borrow.  If you want a “premium” credit card for perks, the company will check your credit score for eligibility.  For the military specifically, not only can having a bad credit score prevent you from joining the military in the first place, but it can also jeopardize your clearance (if you have one).  It can also have an effect on renting a place, or even getting civilian employment after the military.

What affects my credit score?

While many financial situations affect your credit score, some are more important than others.  The most important thing in a credit score is your ability to pay your bills ON TIME.  This includes credit cards, loans, and even your phone bill or rent!  With credit cards or anything else you finance, it is important to note that paying the total amount is not as critical as making sure you at least make the minimum payments on all of your debts.

That does not mean, however, that paying things off in full is NOT important.  The second most critical thing to your score is the total amount you owe across all of your loans / lines of credit vs your available credit (also known as your utilization ratio).  The lower your utilization ratio is, the higher your score will be.  Because your utilization changes every time you pay on your loan or credit card balance, only the past month is used to calculate the score.  

After those two big ticket items, things like how long your line of credit has been open, the various types of credit that you hold and how many “credit pulls” (when banks formally check your credit) you have in the recent history as well as how many new accounts you recently opened.  

***IMPORTANT NOTE***

There have been multiple reports of credit cards not disclosing your balance to reporting agencies if you paid it off in full before it posts every month.  To clarify – if you make a purchase of $10 on the 2nd and pay it off completely on the 3rd, when your card closes out on the 5th, it will show you had no balance all month.  While you can pay off a little bit off during the monthly period, make sure you have a little left over for the time of the statement posting to ensure it gets reported.  Essentially, do not pay the CURRENT balance in full, but rather focus on paying the STATEMENT balance in full.

Misconceptions about increasing your credit score.

There are a lot of “armchair” experts about money matters, and credit is no different.  Some people will advocate for you to keep a balance on your loans to establish a “history”.  Others will tell you to get a loan just to “build credit” when you can pay off the item in cash.  Some will swear their credit score is (near) perfect and they just do not believe in a credit card… While these things will certainly impact your credit score, and as long as you pay at least the minimum balance every month will give even increase it, these statements are crap and your friend that may be advocating these things is a moron.

Let us start with keeping a balance.  This is a TERRIBLE idea if you can pay off the total amount.  Never carry a balance “just because”.  Since the average Credit Card APR is upwards of 15% and even having the SCRA caps it at a whopping 6% limit, you end up GIVING THAT MONEY AWAY FOR NOTHING!  While it is true that your credit score will go up by doing this, it is not because you are paying interest, but strictly because you are paying every month.  The bank does not count how much interest you have paid for the month, but rather just your balance and if you paid on time or not.  Thus, if you paid attention to the post above, paying off the card in full will still show that you are paying every month and will also lower your utilization due to having less debt to your name.

Getting a loan will do the same exact thing as above.  You are paying someone interest for no good reason and decreasing your total net worth (and thus worsening your utilization).  Do not do this unless you are getting a 0% APR loan as that is essentially free money due to inflation.

Lastly, we have credit cards.  Not getting a credit card can be advantageous if you have poor self-control and will feel the urge to max it out.  However, credit cards will give you the best “bang for the buck” towards your credit score due to having that extra utilization available.  i.e. if you have a CC that has a limit of $20,000 and you have nothing on it, you have an extra $20,000 you COULD be borrowing.  In addition, most cards will have some kind of “cash-back” or “bonus points” programs where you will make some of your money back.  I will address this more in depth in my next credit-card focused post.  Lastly, many credit card companies now give you a free credit score based on their available information.  While this will likely not be exactly the same number that a bank might get while doing an official inquiry, it is usually within 20-30 points.

If you have any additional questions or would like clarifications, feel free to give me a shout!

Every week the military gets new members either through basic training or officers getting their commission.  Many of them have only recently graduated high school or college and this will be their first step in being independent.  It is a scary, exciting feeling for many and very easy to get overwhelmed.  Among many questions they ask, one seems to be constant:

What should I do with my money?

The majority of people entering the military will have very limited (if any) financial education and all of a sudden significantly more money than they have been used to.  Most of them have been used to having things pre-budgeted for them, whether because they lived at home and had little to no expenses (or income), or because their schools have allocated their financial assistance/scholarships through the right channels automatically, making financial planning that much easier.

Admittedly, the world of personal finances and especially investments is very vast and easy to get overwhelmed in.  There are rules about what % you should save, and what to spend where everywhere you look and many are either outdated or make sense for your coworker, but not you.

Luckily, there are a few universal truths which, if followed, will set you up for success in or out of the military.  So how do you get on that financially successful path?

1. Spend LESS than you earn

Seems pretty self-explanatory, right?  If only that was the case!  It is so easy to go out and get a car and have a payment that leaves you with just enough to cover insurance and gas.  You think to yourself – well, it’s brand new and under warranty, so things won’t break and since I have a meal card and the dorms (or BAH/BAS), I have no other expenses!  However, things DO happen.  A tire blowout or windshield crack won’t get covered by insurance for example, but since you recently got yourself a star card with a few hundred dollar credit limit, you max out and think you’ll be ok.  Then, you get notified that something happened at home and you need to take emergency leave (and incur travel costs) to go back.  It snowballs quickly and next thing you know, you’re standing in your commander’s office trying to explain your finances and irresponsibleness and possibly facing discipline which will do even more harm to your financial situation.

I say all of the above because I have seen it.  My first roommate when I moved off base couldn’t afford to get a 6-pack of beer outside of a payday weekend multiple times because of his car payment, insurance, cell phone and the occasional lunches/dinners/bars with co-workers he went to that month.

2. Pay YOURSELF first

Now, I will caveat this with the following: if you have prior debts that are high in interest (generally anything above 5%), pay THEM off first.  Once you have broken even, then heed the following advice.

You should set aside at least 10% to go to your savings.  Now, when I say 10% for the military folks, I mean 10% of your TOTAL paycheck – not just your base pay.  First, set aside an emergency fund to last you at LEAST 6 months and to cover the major things that might come up.  Have enough to fly home in case something happens with your family members.  Ensure you are able to pay the car repair bill if something big happens (blown transmission, etc.).  Once that’s done, setting a 10% figure in your TSP through mypay is great, but after you add in the various allowances that we get, it’s not very much in comparison.  

Also keep in mind that 10% savings rate – while a lot better than the average working person today – is still not enough to get you to retire early in most circumstances.  It will, however, set you up for success at retirement age and prevent you from having to work into the grave.  Of course depending on your pension benefits and other investments you may make throughout your career, you still might be able to do so, but that will be covered more in depth in the future.

3. Build the life you want prior to saving for it

Imagine the future at your retirement.  Think about what you want at that moment.  For some, this might mean a cottage in the woods surrounded by acres of land.  For others, they are fine with a small bungalow as long as it is with their family and loved ones.  Everyone’s dreams and priorities are different.  The point is – do not lose sight of what is truly important to you just to save a few dollars.  If you want to have experiences with your significant other, HAVE THEM, just do so responsibly.  Do not focus so much on the future that you lose sight of the present.  Now, this does NOT mean for example, that if you are into cars, you go out and finance a $70,000 BMW or Mercedes.  Think instead of buying a used vehicle that will do what you want while setting aside a few hundred dollars for upgrades to the car, or maybe for a future purchase.

At the end of the day, being a slave to money because you are constantly in debt is an awful feeling, so is being a slave to money because you are trying to maximize every single cent into retirement funds.  

While the above are very basic – and I do not want to overwhelm those who may be new to saving – If you follow these three VERY basic tips, you will be on the path of financial success