Military Financial Advice - Military Times

No time like the present to invest in your future

It's never too late to start investing and planning your financial future, even if you are in your 50s or 60s.

I recently came across a great book, "Start Late, Finish Rich: A No-Fail Plan For Achieving Financial Freedom at Any Age," by David Bach.

The book contains several good ideas, as well as many things I've been telling my clients for 20 years. Here are a few. I'll discuss each in more detail in future columns:

1. Financial planning basics

The starting point of all financial planning is deciding to spend less than you make. Otherwise, you'll live paycheck to paycheck forever. To reduce spending, separate your wants from your needs -- shelter, food, medical care, clothing, heat and transportation. Everything else is a want.

Spending less is usually not easy, but we tend to waste money on many things. Bach has excellent suggestions on getting a handle on what he calls your "latte factor."

2. Credit card debt reduction

The average U.S. family has more than $4,000 in credit card debt. Many carry much larger balances and, in my experience, financial worries contribute greatly to marital problems.

Eliminating credit card balances and getting your spending under control give you the opportunity to invest in your future instead of paying forever for things you bought in the past. Bach has helpful ideas on how to reduce your debt, but he neglects one crucial area:

The reason most people get into debt is they have no savings to meet life's unforeseen circumstances, such as medical expenses, car repairs or broken appliances. If you direct all your energy and "extra" money into paying down debt, you will have no savings to meet unexpected expenses. So, you're likely to put the new expense on a credit card.

After figuring out what amounts you can put aside for investment and debt reduction each month, you need to divide this amount into three parts:

• Calculate your annual emergency expenses, divide by 12 and save this amount each month in a separate account. If you can't save the full amount, save half. Then, when an emergency comes, you will have the savings to pay for it without adding to your credit card balance. Try to put one-third of the amount you can save each month into this category.

• Designate another third to paying down your credit cards. Don't put anything else on the cards during the payoff period. Pay your expenses with cash or a check. If you don't have the money to pay for it, don't buy it. Try to pay off the low-balance, high-interest cards first; pay the minimum on the rest. When one account is paid off, put the card away and start on the next one.

• Invest the final third. The best investment for most military people is the Thrift Savings Plan. Any investment into this plan reduces your taxable income and increases your retirement savings.

Even if you begin with only $25 a month, you need to start. If you wait to get out of debt, you will lose valuable years of compounding. When you get raises, take one-third to half of the monthly raise and increase your TSP investment. If you are saving the maximum amount each year, build additional equity by buying mutual funds and dividend-paying stocks and paying down your mortgage.

3. Buy a house

There are many programs available to help people buy homes. Your basic allowance for housing is tax free, and you can deduct the mortgage interest payments and property taxes on your home from your taxable income.

Real estate prices have grown at a rate at least equal to the inflation rate in most areas of the country. If you plan to be in one place for two years or more, consider buying a home. If you're transferred, you can sell it or rent it. Single-family homes have been the best investment, but townhouses or condos are also good.

Because the tax advantages of owning a home are so substantial, you may be surprised to find that your house payment is not much greater than your present rent payment when you factor in the tax savings of owning your home.

4. Start an investment program

My Jan. 3 column titled "Reinvestment is the key to long-term growth" noted that buying individual stocks and reinvesting the dividends is a low-risk way to achieve above-average returns.

Mutual funds are an excellent way to diversify and get professional management. Monthly investment programs often can be started with just $50 per month. In a later article, I will discuss these options in more detail.

You don't need a large salary to finish rich, but you do have to start saving and investing. It's never too late, so start now.

Barbara H. Pietrowski is a licensed certified public accountant, certified financial planner and personal financial specialist. Her practice includes tax preparation, fee-only financial planning and investment management. Her office is in Kensington, Md. E-mail her at barbarapietrowski@yahoo.com.