A Message to Future You

If you’re reading my articles in chronological order, either in real time or at some undetermined time in the future, you’ll know that my two preceding articles were counter-points to other people’s financial ideas. As much fun as I had writing articles that used macroeconomics to argue against other people’s theories; doing so courts a certain amount of negativity. Granted, the counter-points needed to be made, and I believe I kept the articles congenial, lighthearted, and fact-based. However, at the end of the day, I still argued against someone’s work as opposed to building my own. As a result, I hit the pause button on the Risk Series this week, in order to focus on a more positive message.

Ironically, despite my online negativity I’ve actually been doing some positive stuff in the real world — which just might be the understatement of a lifetime in regards to the internet. Over the past three weeks, I counseled three different military members and/or their spouses on financial issues. Two of those counseling sessions took place face-to-face; while the third took place via email. All of them proved a great experience … for me at least. I learn a lot about myself and other people every time I counsel someone. Whereas I felt like a reluctant financial voyeur during my first counseling session; I actually enjoy them now.

Since Airmen Mildollar constantly points out “personal finance is personal”, it should come as no surprise that each counseling session proved unique. However, the number of consistent Golden Albatross financial themes that appeared in each session surprised me. As a result, I boiled down those consistent themes into four Golden Albatross financial lessons that I believe are worth sharing with everyone. None of these lessons will come as a huge surprise to anyone who follows personal finance issues. Yet, viewed specifically through the lens of the Golden Albatross, I think they take on a new significance.

A Few Words About Our Sponsors

All the people I counseled are younger than me, by at least a decade, if not more. For context, I’m in my mid-40s. I counseled two different military couples. Couple #1 has kids, and are five(ish) years into their military journey. They recently paid off $60K in loans over a few short years. Bravo! As you could probably guess by their debt payoff story, they were already saving a significant percentage of income when I met with them.

What they really wanted to know, was what to do next. They didn’t know if they would, or could, stay military for the entire 20 years (and pension). The husband, who was the active duty military member, still had several years of commitment left for the training program he recently completed. As a result, they’d be around the 10(ish) year mark when the commitment was up.

I walked them through my Golden Albatross financial philosophy and my GRO2W financial planning method. They hoovered up everything I offered, taking notes, and showing me their system. In reality, they were sharp enough and didn’t need my help. I simply streamlined some of the learning process for them and got them rolling on a written plan. If only I’d been that financially locked-on when I was that junior!

Couple #2 is doing well too. No kids, only $10K left on one of their student loans at 5%, and $6K on a car loan at 2.5%. They were already saving 50% of their income before we began to communicate. They also had formulated a plan to pay the remaining debt off after the wife (the military member in the house) gets her stipend later this year. Of note, she is a commissioned officer, but currently in the in the Health Professions Scholarship Program (HPSP). That means she’s technically in the Individual Ready Reserve (IRR), and not earning a salary while she attends medical school. However, HPSP pays for the school and gives her a stipend. The husband works. Together they bring in roughly $50K.

 

As a side note, HPSP is a great way to pay for medical school, and graduate debt free. Of course, there’s an active duty military commitment on the backside. In this case, it’s eight years for the wife after her internship ends. If she gets lucky and earns an active duty internship, she’ll get paid at her rank, promote, and start accumulating time towards her pension! That’s a potential 3 extra years on top of the 8 required after the internship ends; which makes a total of 11 years worth of pension eligibility by the time her active duty commitment is up. Assuming she likes it and does well, she could stay for 20 or longer in order to earn the pension.

The husband picked my brain about investing priorities, once the debt was paid off. He also asked about military life and my feelings on whether they’d want to continue on active duty after doing anywhere from 8 to 11 years. I told him there was no way of divining the future and how happy they’d be after 8 to 11 years of active duty. I also relayed that the best thing to do was to prepare financially for the various opportunities, once they hit the end of the active duty commitment.

Military Member #3 is married with five kids. His wife was not present for the counseling. As you may have deduced, he didn’t just start his military career. He’s a senior non-commissioned officer with approximately 8 – 10 years in the military. Ironically though, he will commission soon through one of the military’s officer programs. A pay raise that he’s looking forward to, and his family needs.

Military member #3 is on a different financial path than Couple #1 or #2. He’s just coming to the realization that things need to change, debt needs to get paid down, saving needs to start, and investing needs to take place. More importantly, financial education is required. As a result of his later start, his lack of planning, a lack of financial education, and some of his previous financial decisions; he believes he has no option but to serve for 30 years on active duty in order to earn a 75% pension. This means he still has roughly twenty more years to go. Holy schneikes! Twenty years is a long time, and a lot could happen which might make him regret those earlier financial decisions.

Which isn’t to say that Military Member #3 is doomed. He’s already doing some of the things required to change his fortunes. He tracks spending, has unloaded a property that was a financial drain and is paying for his spouse’s education to improve her income potential over time. He also sought me out unsolicited. That’s not me blowing my own horn, but a sign of his willingness to change.

Still, we calculated ~$32K in debt split between $16K in credit cards, $7K in a Home Equity Line of Credit (HELOC), and $9K in a car loan. The car loan had the lowest interest rate, followed by the HELOC, and of course the credit cards. By unloading the property he’d amassed a small amount of cash to pay off some of the debt, plus had some monthly surplus to finally start doing something with. His questions mostly centered around what to do, and what order to do it in.

The Youth Caveat

For ease of comparison, you could consider all the military members I counseled junior grade officers somewhere within the first three (officer) pay grades of their service. Couple #1 has the least amount of financial baggage, followed by Couple #2, and then Military Member #3. Given everyone’s youth in this scenario, there’s at least one caveat worth mentioning up front. While I think it’s useful for everyone in a pensionable career to understand the four lessons below; they’ll impact the more junior, or younger, audience members the most. Intuitively, that makes sense because I drew these lessons from counseling younger military members.

The bottom line is that youth have time on their side. What they don’t have is experience. That’s the entire point of meeting with someone like me. I’m there to pass on my experience, in hopes they can marry that up with their youth, and plot a more successful financial path than I did.

A Golden Albatross Review

As a reminder to my old readers, and an introduction to my new readers, the Golden Albatross is an inflection point in the life of every pensionable worker … whether they know it or not. It’s the point where a worker determines if continuing to toil in their chosen profession is worth it, in order to obtain a pension. There are numerous factors influencing that decision, not all of which are bad. However, as I’ve written elsewhere on this blog, I blew through my real Golden Albatross decision point without any realization of the concept or the consequences.

It was only a few years later, during my mental breakdown, that I fully comprehended the error of my ways. By failing to financially educate myself, and despite saving enough to create other career options; I locked myself into a pensionable career that ultimately proved unhealthy for my mental well being. Not everyone will face such emotional or traumatic circumstances with their Golden Albatross. I’m willing to concede that for some people, the Golden Albatross decision may be quite pleasant. However, no matter the circumstances, I want to help people prepare for the Golden Albatross whenever and however it presents itself.

With that context in mind, let’s get to the lessons, and see what I learned.

Lesson One: Financial Knowledge and Financial Options

Unfortunately, lesson one isn’t something as fanboy life-altering as “That Force does not belong to the Jedi“. It’s not even at the level of “wax on, wax off, Daniel-san”. It is nonetheless important. If one wishes to successfully navigate the Golden Albatross, it requires preparation. In this case, preparation takes two things: financial knowledge and options.

My three counseling sessions reinforced this lesson for me. Couple #1 and #2 are already preparing for their Golden Albatross moment. Despite their youth, they’ve already started their financial education. Not only are they reaching out to people like me in the Financial Independence (FI) community, but they are reading, listening, and absorbing everything they can. Furthermore, they are already taking action. Whether that’s deciding on optimal methods for investing their savings or paying down debt; they’re doing the things that will provide them options when they hit their Golden Albatross moment. As long as they maintain their trajectory they’ll be fine no matter their decision.

Military Member #3 is in a different place. In his current financial state, he cannot mentally envision anything less than a 30-year career to obtain a 75% pension. He hasn’t saved, hasn’t invested, and hasn’t educated himself financially. In fact, he may not be able to envision other options, because there may actually be no other options for him at this point. Either way, he has no choice, and no real concept of the inflection point he’s hit. That’s what a lack of options (perceived or real) does to a person. It’s like voting for a president or a leader in a dictatorial state, there’s only one choice on the ballot!

I can empathize with him. When my true Golden Albatross moment hit, I had no awareness I was at an inflection point either. I couldn’t mentally envision anything other than a military career — and I had (albeit unknowingly) saved enough to give myself and my family other options. I was just ignorant.

Lesson Two: Debt Severely Restricts Financial Flexibility

Lesson two is closely tied to lesson one. If you can’t be financially flexible, you won’t have as many financial options when it comes to your Golden Albatross moment, and nothing limits financial flexibility more than debt. Although I should probably qualify that statement by drawing a distinction between the type of debt I’m focusing on with this lesson — commercial and student loan debt.

I’m not talking about leverage or the use of other people’s money to do something productive; like start a business or buy a rental property. In that sense, leverage tends to open up options. Although, ask anyone whose property went underwater in 2007/8/9 if that opened up options, and I’m sure you’ll get a different answer.

Regardless, the danger associated with leverage isn’t necessarily a lesson that emerged from these three counseling sessions. Unless, of course, you count the fact that Military Member #3 learned the hard way to never let relatives “rent” your house. That was more of a lesson in discretion rather than leverage. Be smart, don’t ever rent to a relative. That lesson is for free, thanks to Military Member #3’s in-laws. We can all thank them the next time we see them.

Back to my main point for this section; commercial and student loan debt restricts financial flexibility. What do I mean by that? Part of what I mean is that if a future pension-earner is racking up large loads of commercial debt, they’re probably spending too much, and not saving enough … or at all. That sort of fiscal behavior won’t get them anywhere but further in debt. No amount of pension will save them. However, assuming a future pension-earner stopped the blood flow, and is simply servicing the debt; that’s still capital outflow which might otherwise be put to work better or differently. Specifically, that money could be invested and building wealth for the future pensioner, as opposed to building someone else’s wealth.

Not surprisingly, each counseling session had a debt story that reinforced lesson #2 to varying degrees. The most impressive was Couple #1 paying off their $60K of debt over a few short years. It should come as no surprise that as a result, they are building the most financial options for the future. We talked some about investments (both stocks and property) and priority order, but truthfully, they had it wired. They already knew about things like the Saver’s Tax Credit too. Other than providing some context on what a (traumatic) Golden Albatross moment feels like, the only thing I provided them was a planning method.

Couple #2 is close to Couple #1’s heels. They will eliminate their debt soon and are already starting to invest and plan for the future. They are looking to maximize the tax advantages of their situation as well. We talked a lot about the pluses and minuses of tax-efficient retirement investments, versus the flexibility of a taxable brokerage account; especially given the uncertainty that lay ahead for them.

Military Member #3 wanted to talk investments, but other than telling him to stop buying silver, I kept steering him back to debt elimination. I explained to him the concept of a guaranteed rate of return by paying down the most expensive debt first. We discussed the snowball effect and the psychological advantages of paying off the smallest debt first. Although we talked about long-term goals and how to write a financial plan; all the concrete steps I gave him centered around getting rid of his debt.

As you see from just a review of the topics discussed, the entire tone of my conversation with Military Member #3 was different than my discussions with Couples #1 and #2. Why? Mostly due to the fact that Military Member #3’s debt limited his flexibility and the options worth discussing.

Lesson Three: Bigger Savings and Investments Lead to More Flexibility

I’m sure by now you picked up on the fact that these lessons build on one another. That won’t be the case for lesson #4, but it is the case for lesson #3. Surprisingly, all members I counseled were already saving to some degree — even Military Member #3. He and his family had only just started saving though since the house with the in-laws was sold within the last few months. That isn’t to say that the in-laws were sold, but I’m sure he wishes that was the case. Nothing like cheap in-law joke to get a lesson rolling.

In any case, Military Member #3 isn’t saving a lot on a monthly basis, but he is saving — which is a helluva a lot better than spending more than you make. That said when we discussed if his savings rate could be bumped up; he physically winced. I get it. The dude’s got five kids, and as he explained, they track their money fairly closely. He insisted they are not blowing it on frivolous stuff.

Which led to a discussion on how he tracks his money. He told me he used a spreadsheet. When I asked him whether or not he saved the data, he unfortunately said “no”. Thus, my first recommendation to him was to save each month’s spreadsheet in order to compile more data on how they spend their money. I told him to do it for three months minimum, and then extrapolate a year’s worth of spending (taking into consideration any seasonal issues like the need to run AC in the summer). Once done I explained he’d have a much better idea of where he could gain some savings, based on spending habits.

That said, Military Member’s #3’s financial flexibility and therefore his financial options, remain limited. All his saved money should be used to pay down debt. The more he can save, the faster he can pay down the debt. Once done, and only at that point, could he start investing. Remember, he’s been active duty for ten years already. If he wasn’t planning on a 30-year career, he’d be seriously behind the power curve.

Couple #2 are at the debt re-payment to investing transition point now. Thus, they’re that much further ahead than Military Member #3 at a much younger age. Granted, they don’t have five kids, just a dog. However, propelled by a 50% savings rate, they are well into the process of eliminating the last of their debt. They’ll get a big boost from an upcoming stipend payment by HPSP, which allowed them to go ahead and max out their Roth IRAs this year.

Moving forward, once the debt is fully paid off, the Roth IRAs will get maxed every year (until their tax situation makes a Traditional IRA more sensible). The remainder of what they save will go into a taxable brokerage account in preparation for their unknown future needs. They’re already earning the Saver’s Tax Credit as well, which gives them more money to save and invest. If they can keep this type of discipline up once the wife starts active duty, when tools like the Blended Retirement System (BRS) become available, they’ll crush it no matter what they decide at their Golden Albatross point. Financially educated savings and investments decision leads to flexibility which in turn leads to options. Motivating!

Couple #1’s story motivates me even more. They’re now well into the savings and investing phase. The husband already transitioned to the BRS, contributes his maximum amount, and earns the max amount of matching contributions possible from the government into his Thrift Savings Program (TSP) — the U.S. government’s version of the 401K. This investing is powered by their high savings rate as well. The remainder goes into investments, and they’re also looking to diversify with rental properties. Assuming they keep this up, they’ll have plenty of options when they hit their Golden Albatross moment.

Lesson Four: Write Out a Plan

“A goal without a plan is just a wish.” — Antoine de Saint-Exupéry

“A vision, without a plan, is just a hallucination.” — Will Rogers

This lesson is independent of the others, but its importance was plainly apparent in the two face-to-face counselings I conducted (Couple #1 and Military Member #3). I doubt anyone remembers, but one of the first articles I wrote was a “how to” guide for writing a financial plan using the GRO2W model. I’ve gotten to the point of familiarity with that method that I can walk someone through it in about 15 minutes with specific examples from their financial lives. It blows people away, and I’m not sure why. It’s not magic or rocket surgery. I guess there’s just something special about writing stuff down instead of simply talking, reading, tweeting, or dreaming about it. It’s powerful stuff to watch the look on people’s face when they realize how simple it is to transition their dream of FI into a plan for FI by simply writing it down.

As previously mentioned, even Couple #1 didn’t have a written plan, which was surprising considering how far they’d already come. Showing them the GRO2W method was the one concrete contribution I made the night I met with them. That’s not to say the GRO2W method is the only method for financial planning. There are plenty others. The power is in the act of writing it down, not the method chosen.

I’ll be honest, I think I freaked out Military Member #3 by white-boarding the GRO2W method out for him. I don’t think he expected something that formal when he stopped by my office to chat. I should probably follow up with him to make sure he took on the basics. Now that I think of it, writing down a plan never came up with Couple #2, but it’s probably something I should mention as well. Maybe I’ll just link them to this article.

Lessons Learned

So those are the four Golden Albatross financial lessons I learned from my latest round of financial counseling with various service members. Not much to it, huh? Just to review, they were:

1. Educate yourself financially to create financial options
2. Eliminate debt to increase flexibility
3. Save and invest in order to increase flexibility and options
4. Write your financial plan down

Of course, I seeded a few of my normal financial themes throughout this article as well. My standard “track your money lesson” made an appearance; which should come as no surprise since I’ve written four articles about money tracking software. And of course, let’s not forget “the never rent to your in-laws” and “stop buying silver” lesson provided to us courtesy of Military Member #3. Those came free of charge, and I hope you enjoyed them as much as I did!