Spencer, a 20-something officer in the US Air Force and creator of Military Money Manual, shares his insight on saving and becoming financially independent at an early age on his site. No matter what the financial goal may be, Spencer offers advice on how to achieve it. Though his site is geared towards those in the military, civilians can gain a great deal from it as well. Spencer took the time to talk with us about saving, spending and looking towards the future.
It sounds as if you've been on top of finances since high school. Did your parents influence you to do this, or did you decide on your own?
My parents had a big influence on my early financial decisions, but they let me make my own decisions. Growing up, my dad and I frequently discussed stocks, real estate, and investing. My dad subscribed to The Wall Street Journal and several other financial magazines, which I always read as soon as they came in. As a child, I collected a dollar or two in allowance every week, and I always saved at least a quarter of it, if not all of it. I was always doing the math to see when I would have $100 and could buy a new video game, Lego, or bike. My parents always encouraged me to save for large purchases, sometimes by offering to match whatever I saved.
I worked a few part-time jobs as soon as I turned 16 and had my first real summer internship at age 18. That was the first year I maxed out my Roth IRA. I had done the math on compounding interest and knew that the earlier I started, the more money I would have sooner. I didn't really know what the goal was. I just knew that having more money gave me more choices. It was only later in my 20s that I started seriously studying personal finance and financial independence.
My parents are great role models. They budget tightly, save a large portion of their income, and don't spend frivolously. The 2008 crash was tough on my dad's business, but he worked hard and persevered through it. My mom always cooked homemade meals for us, which kept our food budget under control. Once we kids were all in high school, she went back to work to help us get through college. The example they set for me significantly influenced my decisions as a young adult.
How do you see other 20-somethings around you spending?
The usual things 20-somethings buy. Cars, houses, skis, cellphones. These aren't necessarily bad things. In fact, who cares what they're spending their hard-earned money on? What's more important is if they are investing and letting compounding interest go to work for themselves early. Whenever you receive money, whether it's a paycheck or a windfall, you can decide to spend that money on a depreciating asset (car, cellphone, clothes, video games) or you can invest that money and let it start working for you. Obviously, you need to buy something! But when you really analyze your budget, I think you'll be shocked at how much fluff you can cut out and begin investing.
You can use your 20s to set yourself up for financial independence, or you can take on loads of debt and barely invest any of your paycheck. Either choice may make you happy, but I think setting yourself up with choices later in life is worth not blowing your entire paycheck every month. For me and my wife, we've been steadily increasing our investing rate to the 50% mark since we got married. As my military pay increases and we pay off my student loan debt, this gets easier every year.
I think a lot of people see their paycheck as 90% spending money, instead of an opportunity to begin investing and growing their assets and net worth. I think if you see the charts of how quickly you can achieve financial independence with a substantial savings rate, you would make investing a much higher priority. The numbers work out to about 17 years if you save 50% of your income, which is just a few years shy of a 20-year military retirement. With a moderate savings rate (15-25% of income) and the military pension, there's aren't many reasons you shouldn't be able to be financially independent in your 40s as a veteran.
You set up a priority list which you've seen change over the years. What advice can you give on setting a priority list of spending/saving?
If you want to grow your wealth, you have to make it easy to save and hard to spend. Set up your paycheck to auto-deposit into your 401(k) or TSP. Have your Roth IRA contributions automatically pulled from your checking account. Don't get a credit card until you know how to pay it off every month and you can manage your spending with it online with a site like Mint.com. Debit cards are an excellent way to have the convenience of a credit card without the danger of spending more than you can afford.
My wife and I decided early on in our marriage that we would minimize our biggest expenses: housing and transportation. Our mortgage is well below our BAH (Basic Allowance for Housing), allowing us to pocket the difference in my housing stipend. We also only have one car, but we live in a city where everything is only a short walk away. It's these kinds of choices that can make the difference between struggling to save 10% of your pay and easily saving 50% of your income.
I recommend that everyone look at your expenses and compare dollars spent for happiness gained. For us, we love our mobile phones and get the latest and greatest Android every two years. It's worth it to us to drop $600 every two years. But we don't have time to watch TV, so we don't pay for cable and instead watch Netflix or other free online sites. That saves us much more than $600 per year. It's these small choices that add up to a massive difference over the months and years.
You mention balancing saving for the future and enjoying life now. How do you find that happy medium?
In my experience, most people (myself included) adjust their spending to whatever their current income is. Whether they are making $24,000/year or $100,000/year, it's easy to get to the end of the month and ask: "where did it all go?" This is why tracking your expenses as well as automating your investments is so crucial. When your 401(k)/TSP, Roth IRA, and other investment accounts have already been topped off before you begin spending your paycheck, you'll automatically adjust your spending. It's incredible how it works, but it really does work.
When you automate your investments and just live on the remainder, you quickly discover what really makes you happy. I think a lot of people don't realize what makes them actually happy. For me, family, friends, good food, and a good book are all it takes to keep me happy. Notice that none of these things cost very much. Of course, I occasionally enjoy boating, skiing, flying a private aircraft, or other expensive hobbies. I can enjoy those hobbies knowing that half my paycheck is getting invested, automatically, every month, without any input from me. It's very liberating!
How can someone who is already deep in debt work themselves out? Or maybe an easier question is, how do they get started working out of it?
Commit yourself to the goal, cut expenses, increase your income, and be consistent. The actual process to get of debt is easy, it's the follow-through that is hard. Just like making saving easy and spending hard, you need to make your debt repayment easy and adding additional debt or spending your extra payments hard. Make your loan payments automatic and substantial.
Don't just make the minimum payments. Be aggressive with your payments and destroy that debt! Whatever amount you think you can afford to make extra payments, add 10% and round up to the nearest hundred. Paying down debt isn't fun, but being able to decide where every dollar of your paycheck goes makes it worth it. And that's the ultimate goal with casting off your debt. Deciding where you'll spend or invest every dollar you earn.
Three years ago, my wife and I had $100,000 of student loans when we married. She worked for a year and saved every penny until we paid off her entire $40,000 loan in one payment. That felt great! My loan today sits around $26,000, so we paid off around $74,000 in the last three years. We would have it completely paid off, but the interest rate is now less than 3%, so we've decided to prioritize investing instead.
One of my biggest financial regrets is taking out so many loans for college. I think our nation does a disservice to our youth by saddling them with substantial debt obligations before they even make their first paycheck. Other nations have figured out much better ways to manage student loans than we have in the States. However, now that I've accepted this obligation, I'm going to see it through until it's paid off. It should be about two years from now!
My best advice for debt is: never, except for a home mortgage.
What are some easy to remedy mistakes you see young adults doing in their financial lives?
Start investing now! Not tomorrow, not next month, but now! The longer you wait, the more opportunities you miss for compounding interest to go to work for you. There's a chart that shows if you invest $2,000/month throughout your 20s and then stop investing versus $2,000/month throughout your 30s, 40s, and 50s - guess who has more by age 60? The one who invested in their 20s. There are a lot of competing interests for your dollars. If you make investing a priority, you will reap the benefits later in life.
I think a lot of young people overextend themselves as well. When you take on car loans, a mortgage, and you're still paying off your student loan debt, it's a lot of monthly obligations. This just ties up your monthly paycheck and doesn't give you options. Before you sign up for any recurring monthly bill, just think of the future earnings you are foregoing because you're not investing that amount monthly. When you start to think of every dollar that you receive as either a dollar to spend or a dollar to invest, it changes your perspective. Investing becomes the obvious choice because without building your assets, you'll never free yourself from having to trade your time for money.
As an officer in the US Air Force, your site is primarily geared to those in the military. Can civilians benefit from your advice, too?
I hope so! I write to a military audience because that's what I know. The military financial world is different from civilians in many respects including taxes, pay raises, retirement options, and investment options. We receive un-taxed allowances, serve in un-taxed combat zones, and collect special hazardous duty pays depending on our job and location. All of these make the military financial world a bit different from the civilian world.
With my site, I hope to demonstrate that even on a fixed salary set by Congress, it's possible to achieve the dream of financial independence. You don't need to be a 1%er to save, invest, and become wealthy. I'm on my way to my financial goals, and I want to share what I learn along the way with military service members and civilians both.