Last summer there were many graduation ceremonies, and millions of new employees joined the workforce. In the military version of this milestone, thousands of new O-1s received their commissions and tens of thousands of other new recruits started their basic training.
It’s a very busy time. These new servicemembers are getting an incredible education (some of it delivered in a loud voice) and frankly, they have new skills to learn. There’s too much going on in their lives for me to waste their time with 3000 words of financial life guidance.
But everybody eventually gets a few days of leave. They’re spending their paychecks and they know that they need to manage their finances. They realize that they have a Thrift Savings Plan account and maybe they should do something with it. By late summer and early fall, the reader questions are starting to show up in my e-mail:
I was hoping to seek some financial advice. I’ve started paying off debt and I have an emergency fund. I intend to put about 15% of my pay toward a Roth TSP. Any recommendations on my current plan and where to go from here?
Do you have a link to info about which TSP fund is the best fund to join?
At this point in your service, the best use of your time is learning your job and getting qualified. Unless you’re hardwired to be an investor like Warren Buffett, you’re too busy to spend any energy on saving and investing. Psychologists have done thousands of behavioral-finance experiments on many people like you, and they know how overwhelming life can be in your late teens and early 20s.
The researchers say that your biggest financial issues right now are hedonic adaptation, paralysis by analysis, and decision fatigue.
Your challenge is making a few financial decisions, minimizing your financial chores, and putting everything in autopilot. Then you can go back out and get qualified, because pretty soon you’ll have the midwatch and the weekend duty.
When those paychecks finally roll in, you’re ready to enjoy the finer things in life. Unfortunately this hedonism comes at a price: it’s very easy to jump on the consumer treadmill and fill your world with material possessions. However, you don’t have much free time, and some of you have debt. Do you really want to spend your scarce and valuable liberty hours taking care of stuff? Do you want to work for the rest of your life to pay for your lifestyle?
When you start spending, take a few minutes to track your expenses. Keep it simple: a smartphone app, or a spreadsheet, or just pencil & paper. Don’t criticize yourself or go on a financial diet, but learn where your money goes. After a few months you’ll review your data and you’ll start cutting out the waste. You’ll align your spending with your values. You’re the person who has to be willing to work the extra months for the extra spending.
But simplify your tracking systems. Don’t fill your life with financial chores or build elaborate financial life plans. Simply look at your expenses every 2-3 months to decide whether you’re spending on the things that you value– or whether you can cut out more waste.
As your earnings go up (annual pay raises, promotions, flight pay, sea pay) then give yourself a small party. (You’ve earned it!) Then try to throw at least 80% of the extra money at paying off debt and boosting your savings. The key is living a fulfilling life without wasting your money. Be frugal but don’t cross the line into deprivation. (Your military duties will give you all the deprivation you can handle.) Right now you don’t have the time for lifestyle expansion– keep it simple.
Paralysis by analysis
You have thousands of investment choices and asset allocations. Almost all of them are good, and most of them will get you to financial independence. Your key is optimizing a few factors and choosing your asset allocation. Create a good plan today, and in a few years you’ll tweak it to an outstanding plan.
Later in your career you’ll make time to develop your investing skills, or build your own side-hustle business, or rehab rental real estate, or choose individual dividend-paying stocks. Those will all accelerate your financial independence, but right now you don’t have the time. Your military duties have priority and you should simplify the rest of your life.
You can only control two factors of your asset allocation: diversification and fund expenses. For new servicemembers that boils down to passively-managed index funds with low expense ratios. Conveniently, the federal government’s Thrift Savings Plan fills all of those requirements. It’s the world’s largest collection of passive index funds with the world’s lowest expense ratios. The TSP doesn’t have all the features and convenience that you can find with investments from financial companies like Vanguard and Fidelity, but the TSP’s expenses are less than half of the funds from those industry leaders.
Yet even the TSP has two types of accounts, five main funds, and several “lifecycle” funds. Which should you choose?
Again, let’s start with a simple answer. The traditional TSP will shelter some of your income from taxes, but right now you don’t need that. When you do your tax returns, you’ll have enough deductions and credits to pay very few taxes. You’ll be an E-6 or an O-3 before your tax bill starts to rise.
One nasty side effect of the traditional TSP is that you’ll eventually have to pay taxes on its withdrawals (much later in life). However, you can avoid that issue today by putting your contributions in your Roth TSP account. You’ll probably use the traditional TSP later in your career, but for the next few years the Roth TSP offers more advantages.
Now you’ve chosen your TSP account. Which funds do you want?
If you don’t know which funds are best (and maybe you don’t really care) then pick the L2050 fund. It’s a mix of the TSP’s five main funds, and the L funds automatically adjust their asset allocation over time. Right now, at the start of your career, it’s an aggressive combination of stock indexes (the C, S, and I funds) with a little bit of bonds and government securities (the F and G funds). As the years go by, an L fund will gradually cut back on the stock funds and gradually boost the bond funds.
If you want to invest even more aggressively (because you have a steady paycheck for the next few years) then you could split your TSP contributions among the C, S, and I equity funds.
You’ve tracked your spending, cut back the waste, started paying down debt, and picked out your investments.
A few of you find this fascinating (welcome to the club!), but most of you just want to get it over with so that you can enjoy a little fun before you go back to work. You know, that weekend duty. And are you qualified yet? Yeah.
Imagine if you had to go through these financial decisions with every paycheck.
Decision fatigue is a well-documented behavioral psychology phenomenon. You start every day with a certain amount of willpower and cognitive focus, but as the day goes on you literally get tired of figuring out the right choices. By the end of the day you’d rather let someone else take over the dinner plans and the rest of the family duties so that you can just relax.
Your financial chores are just one more set of decisions to make– if you ever get around to that.
Instead of making the same decisions every paycheck, make them once and then automate them. When you figure out how much money you’ll put toward investing and paying off debt, then set up your myPay account to transfer the money to the TSP straight out of your paycheck. Set up your TSP account to invest your contributions in your Roth TSP account and in your chosen funds. Set up your bills to be automatically paid from your checking account.
Never miss a payment deadline again. Better still, you won’t even have to decide what to do about it.
After you put your financial life in autopilot, try to leave it alone for a year or two. Check your statements every 3-6 months but don’t obsess over them. You might have to tweak your savings and investment plan every few months until your paychecks settle into a routine.
If you’re cutting out wasteful spending then every month or two you might actually put more cash toward debt payment or savings.
As your earnings rise, consider this: if you can save at least 40% of your income for the next 20 years then you’ll reach financial independence on your own investments— you won’t even need a pension.
Let’s get the plan moving:
Now start tracking your expenses, set up a small TSP contribution in myPay, and sign up for the TSP.
How Many Years Does It Take To Reach Financial Independence? (Calculator version)
How Many Years Does It Take To Become Financially Independent? (Simple math version)
Saving Base Pay And Promotion Raises
Tailor Your Investments To Your Military Pay (And Maybe Your Pension)