5 Worst Financial Mistakes to Avoid for Military Members

Maybe you’ve made some of these mistakes military members make.

I made a few of these mistakes myself, but I’m still here today doing relatively well.

Let’s see how you measure up.

1. GOING INTO DEBT

I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.

It’s living large when you haven’t made that money yet.

Spending money you haven’t earned.  Otherwise known as… Keeping up with the Jones’s. 

The funny thing is, the Jones’s are going into debt to keep up with you too!

Here are some things that will really put you into debt:

Buying or renting much more house than you need…

I see it time and time again in the military.  A married couple with one newborn buying a 4000 sq ft property.  Not sure what they will do with 6 bedrooms and 4 baths!

You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)

Having a new house custom built…

But it’s so nice to have a big house built to your specifications.  You deserve it!

Big houses need lots of things to fill them up.  They just don’t look right without expensive furniture and nice cars.  They are also expensive to heat and cool.  Good luck!

New or expensive cars…

Whatever you do, don’t buy a new car.  On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales.  You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.

I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.

Vacationing while overseas…

You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one.  You are in Japan, and it’s the perfect gateway to Southeast Asia.  Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas. 

Don’t overdo it.  Take advantage of existing geography and vacation in areas around you that you.  Try to drive there instead of flying, and try to Airbnb instead of hotels.

The cardinal sins of debt…

Here are things I just think are horrible ideas.  If you’ve made these mistakes, god bless you.

• Leasing a car is a massive waste of money.  Don’t ever consider it.

• Boats are a wasteful extra expense that are typically grossly underutilized.  Motorcycles aren’t much better (I’ll get some hate mail on this). 

• For god sake, do not EVER buy a timeshare.  You are prepaying for future vacations whether you take them or not, and you are overpaying.  Big mistake.

2. DELAYING PAYING OFF DEBT

So you’ve let yourself get into debt.

The next mistake I see a lot is not prioritizing getting out of debt.

In the military, a common example of this mistake is trying to buy a house, invest in the stock market, buy a boat, buy new furniture, or take another expensive vacation while you still have high-interest credit card debt.  You also might still have significant student loan debt.

This just doesn’t make good common sense.

You don’t create new debt while you still have significant high interest debt. 

Don’t invest in a traditional brokerage or mutual account until you pay off high or medium interest debt. 

Also, you haven’t earned the right to make expensive purchases until you’ve dug yourself out of the debt hole you’re in.

Get rid of all debt, starting with the high interest stuff first.  You need to think of student loan debt as bad debt too.  A primary residence can be considered ok debt (I shy away from the term good debt), but just make sure that once you move away, you are not losing money on this property.

How to Payoff Debt and Build Wealth

3. NOT MAXIMIZING YOUR RETIREMENT BENEFITS

Dude, c’mon!

This is a super common money mistake I see people in the military making, and it sends off alarm signals and lights flashing in my head.

If you are thinking about buying cars, going on vacation, investing money in the stock market, buying a Harley, or anything else with your hard earned money, and you haven’t maxed out your retirement accounts yet…

YOU ARE WRONG!

So what exactly are retirement benefits?

I’m glad you asked.

A lot of people are unclear on what they qualify for.

Here it is.

Everybody in the military qualifies for both the TSP benefit AND an IRA benefit.

People often don’t realize you get both.

Also, if you are married, your spouse can also contribute to their IRA…

EVEN IF SHE ISN’T WORKING

So, you should be contributing $19,000 a year (the current max for 2019) to your TSP and $6,000 to your IRA.

Why? 

Retirement accounts are ways to legally cheat on taxes.  If you don’t take advantage of this each year, you can’t go back and fix it later.  It is a smart move for your future retirement.

It means lots more money at retirement!

Don’t make this mistake!

(End of rant)

4. NOT INVESTING PROPERLY

There isn’t just one way to invest correctly.  There are several ways.  I’m not so sure I want to try to tell you what the right way to invest is.  That’s an entirely separate subject. 

I will list examples of the kind of mistakes people make. Here’s what to avoid…

Chasing hype

Bitcoin is a great example of hype.  Another would be marijuana stocks. You don’t want to be investing in the next hot thing.  If everybody is talking about something, it is not a good investment. 

IPOs, the newest technology, the talk around the water cooler, the next hot thing, these are investments to stay away from.  If it’s getting tons of media attention, it’s already too late.  It’s liable to do the opposite of what everyone thinks it will do. 

Chasing returns

A lot of times, people make decisions about stocks or mutual funds based on the recent returns of that company.  This is a bad idea.  Often, those returns happened for certain reasons that are difficult to understand. 

It may have been that the market was favorable to that sector  This temporary surge has no bearing on whether this asset will continue to rise in the future.  In fact, it’s typically more likely it won’t.

Eggs in one basket

Putting all your money is one company, no matter how stable it seems, can prove to be disastrous.  Look at Bear Stearns.  It was a massive financial behemoth that no one ever imagined could be in danger.  I had my money invested there at one point, and my financial advisor had millions  in company stock. 

When the company went bankrupt during the banking risk management meltdown of 2008, he assured me that my assets were safe, but I found out all his company stock had vanished.  Millions.  Think of the energy giant Enron.  No one should ever put all their money in one company.  You need to diversify enough so that if any one company would fail, you would not be destitute.

Timing the market

If your money is invested in the market, and it takes a large dip, you need to resist the urge to sell everything.  This is a herd mentality.  Everybody wants to sell their stocks before they drop 40 or 50% and avoid large losses.  They then hope to buy back in at the bottom and participate in the ride back up.

This almost never works in reality.  There are too many false drops and false bottoms, and people’s timing is way off.  It is almost impossible to get this right, and you are better off never selling, and riding these corrections out.  Sometimes it may take several months, but you will lose more money if you try to time the market.

Armed with these tips above, you can avoid common investing mistakes I see military members make all the time.

How to Invest Your Money and Retire Early

5. BUYING HOUSES THAT WON’T MAKE GOOD RENTALS

This one’s a doozie.

This tip is last, but it’s the most important item on this list. 

Houses are difficult to buy and sell.  They are illiquid.  Very time consuming and expensive to turn into cash.

For this reason, mistakes with real estate tend to be painful and expensive.  People that make mistakes with real estate will let it suck the life out of them over decades, often never doing anything about it.

Learn this important lesson!

Military members often subscribe to this silly myth that if you buy a house at every duty station, and then rent it out when you leave, you’ll retire a millionaire.

Nothing could be further from the truth.  In fact, the exact opposite it true.  You’ll end up worse off than most people.

Why?  Likely you are buying the wrong types of houses for rental properties.

You can’t just buy anything!

You can see the problem more clearly when you apply the 1% rule to the properties you are buying.

The 1% rule – A property should be able to rent for at least 1% of the acquisition price (purchase price + cost of fixing it up)

This means a property that you buy for $90,000, and costs $10,000 to repair should rent for $1000 a month or more to satisfy the 1% rule.  If it rents for less, it would not make a good rental property.  It would be a poor investment.

So the correct thought process for housing is, don’t buy a house while you are on active duty unless it will make a good rental property when you move away. 

A good starting point for knowing this is, does the property you are planning on buying pass the 1% rule.  If it doesn’t, chances it will make a good rental property are very low.

The more expensive a house is, the more difficult this rule is to satisfy.  This means it is difficult or impossible to make the 1% rule work in high cost of living (HCOL) areas.

It is not a good idea to purchase homes in HCOL areas while on active duty.  Staying 1-3 years is not enough time to build up the appreciation you would need to make money when you move and need to sell.  Keeping it as a rental will result in negative cash flow each month.  Bad idea.

Real Estate Mistakes Military Members Should Avoid

CONCLUSION

With the following tips, you can avoid the mistakes that lots of military members end up with.

Stay away from the big debt traps.  They’re scary!

Prioritize getting out of debt and do it the right way.

Maximize your retirement benefits, it’s a legal way to cheat on taxes!

Make sure you are investing properly, and do this by avoiding the common investing traps military members fall into.

Lastly, only buy real estate when it’s make sense financially.

You’ll be far better off this way.

What’s the mistakes you’ve seen military members make? Maybe someone you know? Leave me a comment about it.

Good luck.

Rich on Money

Wanna know how I got to 20 paid-off single family homes? Check out my Complete Guide to Real Estate Investing.