Short post today, folks. It’s a straightforward topic and you’re probably busy getting ready for the holidays!
Before we start, here’s another reminder about getting on the road to financial independence: are you tracking your spending yet? If you’ve been doing that for a few months, then have you put together a budget? Next let’s talk about how much of your spending & budgeting should be devoted to saving and investing.
Make it Automatic with Payroll Deductions
Financial advisers (and our parents) use dozens of sound-bite homilies to get our money out of our hot little hands and into an investment account before we’re subjected to temptation. “Pay yourself first.” “Out of sight, out of mind.” “You can’t spend it if you don’t have it.”
As annoying as that advice may be, it works. Frugality and budgeting help you align your spending with your values. If saving isn’t a top priority then it will never be an important part of your budget, and you won’t save enough to let compounding work its retirement magic.
Every day you’re confronted with spending choices– the $4 latté, buying lunch instead of bringing your own, maybe stopping at the exchange for a six-pack and a new DVD on the way home. But how often do we see our savings choices? Even if you happen to find a way to save money that day, you’re not going to run to the nearest ATM to deposit it into your savings account.
Instead of having to compare every daily spending decision against your savings goals, though, you can set a savings goal and then put it in autopilot. After you build your budget and decide how much you can afford to save, then use your service’s payroll deductions and allotments to make it happen automatically. You have five main choices to decide where to save and invest your money: your Thrift Savings Plan, your IRA(s), your taxable investment accounts, your savings account, and (if you have a civilian job) your employer’s defined-contribution plan (like a 401(k)).
After you set your savings goal, then try to start the investing process by maximizing your contributions to your Thrift Savings Plan. Next consider an allotment to a fund company for your IRA. When the rest of your paycheck arrives in your checking account, have an automatic deduction send some of it to a taxable investment account. Sweep more of it to your money-market or savings account. Leave only that month’s budget in your checking account.
Whatever savings and investing goals you choose, let technology take care of it for you every payday so that you’re not tempted to “adjust” the priorities every month for a little lifestyle upgrade. When deductions whisk the money away before it’s in our hot little hands, it’s easier to conserve what’s left and make it last until the next payday. You won’t be tempted to rationalize yet another month of spending while feeling that you just can’t seem to save as much as you hoped.
Save the Special Pay and the Pay Raises
A huge opportunity comes with every annual military pay raise, longevity pay raise, special pay, bonus, and promotion. For example, take a look at the military pay tables and imagine the “wealth effect” of a two-year longevity raise or a promotion. If you don’t control your expenses to your budget (especially for “entertainment”) then this “extra money” just gets spent without planning for its effect on your financial independence.
These are the windfalls that you may be able to learn to live without and can send straight to savings. Some pay raises are more permanent (annual raises, promotions) than others (combat pay, hazardous duty pay, bonuses). Inflation will also continue to eat away at a budget and a growing family will always grow more expensive. But instead of raising your spending in anticipation of more pay, try to raise your savings rate.
A good compromise between frugality and deprivation would be to attempt to save at least 80% of every extra pay. You’re giving yourself a little spending treat (10-20%) but the reality is that you’re trying to save almost all of it. If you try that for a couple of months and it’s causing too much pain then you can reduce the savings percentage. It’s far less painful to ease up on the savings rate than to try to raise it!
The next post will go into more detail on the TSP, IRAs, and taxable investment accounts. After that we’ll talk about how much to save, and for how long.
Military retirement spending: how much will I need?
Retirement finances: what will I spend?
Military retirement: how much can I really spend?
Retiring on multiple streams of income
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