Achieving Financial Freedom in The Military
I get asked about the basic steps to achieving financial freedom all the time. For that reason, I wanted to release this short beginner’s guide to achieving financial freedom in the military.
This is not an all-inclusive financial article, but rather a simple hierarchy of financial steps I find valuable on your journey to achieving financial freedom.
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Earn The Complete Matching TSP Contribution
It baffles me that people aren’t doing this.
Let’s say I told you that for every $100 you gave me, I would give you $100, and let you keep your first $100. Would you take it?
I’m sure you would!
This is exactly what the matching contribution is. The government is giving you a 5% pay raise, just for contributing 5% to your Thrift Savings Plan (TSP). Looking at this another way, that is an instant—and guaranteed—100% return on your investment, for the first 5% you contribute to your TSP.
You are literally turning down free money if you don’t contribute at least 5% to your TSP. The more you get promoted, the more sense this makes. Currently, the matching contribution is around $200/month for me!
The one caveat here, is that you won’t actually begin receiving the full 5% matching contribution until after you have successfully completed two years in the military. You’ll receive the 1% automatic contribution, but the other 4% will come later.
That being said, you should always put at least 5% into your TSP, because you don’t want to miss out on the matching contribution when it does kick in.
I generally recommend to start your allotment at 10% right out the gate, and then you can increase it a little with every pay raise you receive!
The reason you do this first is to ensure you’re not missing out on that matching contribution, and also because the TSP is an incredibly powerful way to benefit from compound interest.
One Month Emergency Fund
The next thing you should do is build up an emergency fund equivalent to one month of your expenses.
The reason I suggest an emergency fund for only a single month—which may sound counterintuitive to some of you—is simple.
You obviously want to have an emergency fund on standby in order to cover your a$$ in case of any emergencies that may arise. However, saving money in an emergency fund if you have a lot of bad debt just means that the bad debt is eating away at your net worth with the interest you’re having to pay each month.
For this reason, I recommend building up just enough of an emergency fund that you can dip into if an issue arises instead of resorting to a credit card. Then you can focus on paying off the bad debt and know that you won’t be using credit cards to cover any unexpected expenses that arise.
Ultimately, it won’t kill you to increase the amount in your emergency fund a little more if you would like, but I don’t think it is necessary just yet.
Pay Off Bad Debt
Paying off bad debt is the next step in this process. I understand this is not necessarily a fun step to take, but it is necessary.
Now, let me clarify that I don’t believe it is necessary to pay off every debt you have. I don’t think you need to rush to pay off a 2-3% interest auto loan. I don’t think you need to pay off your mortgage quickly either.
The caveat to this is obviously if you won’t sleep well at night with that debt burden, in which case you might as well pay it off and just be done with it.
Now, there are two main ways to pay off debt: the snowball method and the avalanche method.
With both methods, you should pay the minimum payment on every debt, except for one. On that one debt, you want to put every dollar you possibly can into the monthly payment until it is gone. Once you have paid that debt off, roll your capital into the next debt, and continue to crush each debt with more money as you pay off each consecutive balance.
The avalanche method is when you line up all of your debts, and payoff whichever has the highest interest rate first. Then the next highest interest rate, and so on and so forth, until all of your debt is erased.
The snowball method, is similar to the above, except that you begin by paying off whichever debt has the smallest dollar amount, and then roll into the next largest dollar amount, and so on.
Financially, the avalanche method is best. Erasing that high-interest debt first is the most logical way to erase your debt.
Psychologically, the snowball method is best. This method allows you to experience a small win early on when you pay off your smallest debt. Then, you continue to have small wins until your debt is gone. This is a great method too and is shown to have a higher success rate because of the small wins along your journey.
Paying off your debt may not be fun, but it has a ton of advantages!
House Hack – With The VA Loan If Possible
The house hack is my favorite real estate strategy for beginner real estate investors (and basically everyone else too) for many reasons.
First, you will get to understand the basics of being a landlord, whether you self-manage or hire a property manager.
Third, you will save a ton of money that you would have been paying to live somewhere else anyway. House hacking can often allow you to live in your own home for free, which means every penny you would have put toward housing expenses can now be reinvested elsewhere (notice I did not say “spent aimlessly”) haha.
Last, it is a lot less scary to buy a primary residence than it is an investment property. Lots of people get nervous when buying investment properties, which is understandable, but because most of us grew up hearing that the American dream involves owning your own home, buying a house for yourself isn’t nearly as scary.
For these reasons, house hacking is the single best way to jump into real estate investing, in my opinion.
You can then use the money that would have gone toward your housing expenses to take advantage of the rest of these steps and expedite your journey to financial independence.
$10,000 Cash Reserves
If you decided to house hack, you should definitely save $10,000 in liquid, accessible cash for reserves. This is the fund you tap into if a water heater goes out, or hail damages your roof, etc. Having cash reserves is a must when owning real estate because you would much rather have the cash and not need it than need it and not have it!
If you haven’t house hacked yet but plan to—or just buy real estate in general—it is smart to save this $10,000 anyway. If an emergency pops up while you’re building, these cash reserves can be used to cover your rear if necessary.
3-6 Months’ Emergency Fund
If you have already saved up your cash reserves, or aren’t planning to buy real estate anytime soon, you should begin building out your emergency fund. Many people recommend saving 3-6 months as your emergency—read “oh shit”—fund. Some people even recommend having a full year’s worth of expenses covered in your emergency fund.
Ultimately, the amount of runway you want your emergency fund to cover is entirely up to your personal risk tolerance levels. Again, you want to be able to sleep at night.
Since I’m still active duty, I have taken a somewhat different view on emergency funds. I’m not recommending this is what you do, but it can work just fine if you’re smart.
I maintain one month’s expenses in my emergency fund. I don’t maintain much more than this because I know that I will receive my next paycheck, and the paycheck after that. Then, I maintain a very low balance (if anything) on one of my credit cards, which is more than capable of handling the next 3, 4, 5+ months’ worth of expenses. If anything crazy comes up, I can swipe my credit card, and then focus my efforts on paying it back down to a zero balance.
I know there are many personal finance people who probably just had a heart attack, but this is the realty for my situation. I know that I will not use that credit card outside of emergencies, and I know that I’ll be able to pay it back down very quickly.
I would rather invest my “emergency fund” cash in an index fund, or real estate investment, than just leave it sitting in a savings account. When an emergency arises, I can always tap into the index fund, pull equity from a real estate investment, or swipe my credit card.
For me, the risk of a crazy emergency is small enough, that I’m okay paying interest while paying it back down if I have to.
Again, your risk tolerance and ability to not swipe the credit card matters. Do not use this strategy unless you know that you will not rack up debt on the credit card.
Maximize Your TSP/401(k) Contributions
The next place you want to put your money is into a tax-advantaged retirement account.
The reason you want to max out your TSP contributions is simple. Compound interest will help your Thrift Savings Plan grow a lot over your lifetime, and the more money you contribute, sooner, the better!
Every $100 invested when you are 20, is equal to approximately every $200 invested when you are 30, assuming an average of 7% interest over that period. You owe it to yourself to contribute a lot of money when you are young, and continue contributing to your TSP for the long haul.
This investment is completely passive, will grow a lot over time, and the tax advantages are sweet.
I am a huge fan of the TSP, and a shining example of why you should contribute a lot while you’re young. I have been playing catchup for a little while now and wish I had contributed a lot more when I was younger!
You can always roll your Thrift Savings Plan into another investment vessel later if you would like, but that is a conversation for another day.
Invest in Real Estate and/or Index Funds – Your Preferred Niche
After you’ve paid off your bad debt, maximized your Thrift Savings Plan contributions, (maybe) house hacked, and built an emergency fund, it is time to really build wealth!
Every extra dollar that isn’t required to support your lifestyle should be reinvested into achieving financial freedom.
At this point there are a lot of different routes you can take to achieve financial freedom. There are so many assets you can invest in and I urge you to learn a little about them all in order to decide what investment(s) best fit your long-term goals in life.
Personally, I invest the vast majority of my capital in real estate. I primarily buy and hold rental properties, but have bought a couple of flips, and done a little wholesaling as well. Ultimately real estate investing is a great way to build wealth, but it is not the most passive way you can invest your capital.
That being said, there are some passive investment opportunities in real estate as well, such as private lending on other people’s deals, or investing as a limited partner in syndications. If you would like to see some passive investment opportunities from us, feel free to jump on our investor email list!
I also invest some of my capital into index funds. Index funds are a great way to invest across a broad spectrum of the market without having to individually choose stocks. Simply setup an allotment to these funds every month, and let the money grow! This is about as passive as it gets, and I recommend you check out the book The Simple Path to Wealth by J.L. Collins for more information!
You could also invest in individual stocks through an app like Webull or Robinhood or in Cryptocurrency with an application like Coinbase if you would like. I have about 2% of my net worth in individual stocks, if that. I don’t believe timing the market is a smart move, and as such I view these small investments as gambling. Sure, they may grow (and quite quickly in some cases), but the taxes you pay on short term capital gains are brutal, and timing the market is hard and almost downright impossible over the long haul.
As an added bonus, if you join Webull through this link, they will hook you up with two free stocks after you deposit $100 into the account. These stocks can be worth as much as $1,600 per share, and I like using this app for investing!
It is up to you to choose the best investment strategy for your long-term goals. Don’t let people badger you into their strategy of choice or scare you into analysis paralysis.
You just need to get started. The sooner you begin investing, the faster you’ll see those accounts begin to grow!
TL;DR – Beginners Guide to Achieving Financial Freedom in The Military
- Pay off your shitty debt.
- Prepare for unexpected emergencies
- Invest like your life depends on it!
Yep, it’s that simple!