I’ve been at the beach for a month.
I came to visit Doug Nordman (The Military Guide), who after 20 years in the Navy, now spends his time surfing and writing about military personal finance (in that order).
I just hit 20 years in the military myself, and like he did, designed a life where I’ll now pursue my interests instead of being tied to a desk.
We’re not the only people doing this.
We are part of a growing community focused on the best way to achieve financial independence earlier than most.
This is an order of operations checklist. There are reasons why you should do things in this order. It’s optimized.
It will help you achieve your personal finance goals faster and easier than we did.
Get my FREE 2-page PDF cheat sheet on the 7 steps to optimal investing in the military.
Get the Match in your TSP/401k.
The very first thing you do with your money, even before you start paying off debt, is contribute enough money to your TSP or 401k to get the free match that is offered.
This only applies if you have matching available in your TSP or 401(k).
If matching is not offered, skip this step.
The reason for taking matching in the TSP first is simple.
It’s free money.
You don’t want to miss it.
It is a much higher return on investment (ROI) than paying off debt.
In the case of the TSP, if you contribute 5%, the government gives you a match of 5%.
This money essentially gets doubled. That’s why it’s first on our list!
For military, this matching only applies to those who are in the blended retirement system (BRS).
The BRS is the new retirement system for active duty with TSP matching that did not previously exist.
If you joined the service between January 1, 2006 and Jan 1, 2018, you had the ability to refuse or opt into the BRS.
For those who joined after Jan 1, 2018, you were automatically signed up for the BRS.
If you fall under the legacy retirement system, and not the BRS, you have no matching in your TSP.
In that case, you do not contribute any money to your TSP until step 5.
Emergency Fund – One Month of Expenses
The emergency fund is often a controversial step in a checklist like this.
Some say you don’t need it if you have access to a credit card, Roth IRA contributions, or even normal investments like stocks or a mutual fund.
Others argue having 6 months of expenses in cash is mandatory. The Dave Ramsey cult followers want to be ready for a zombie apocalypse.
While I joke about my good buddy Dave, things like global pandemics and Capitol riots can remind us of the wisdom behind this conservative practice.
In the military, you are going to be fine if you have a month’s spending in cash.
There is a decent amount of security in this job. It’s not common we get surprised with layoffs.
The most common issues we run into are things like surprise car or home expenses, problems with pay that take a month or so to resolve, needing to go to a funeral (sometimes the military covers this), etc.
If you needed help beyond the one month of funds, there are several avenues.
- Go through the military. There are a number of organizations that can help in crisis.
- You can pull Roth IRA contributions out penalty-free after it’s been open for 5 years.
- When you move to a new assignment, you can take an advance on your paycheck to cover your expenses. I’ve seen people get 2 or 3 times their pay for this.
- Use a credit card for emergencies.
- Sell stocks or a mutual funds in a brokerage account
Pay off Consumer Debt
The next step on this list is an important one on the road to riches.
It is getting rid of your consumer debt.
I consider this everything besides student loans and your primary residence.
Bonus points for paying those off, but not necessary.
Let’s become debt-free and stay there.
There are two popular debt payoff methods; debt snowball and debt avalanche.
I recommend the debt snowball over the debt avalanche method.
The debt snowball method is where you list all of your debt balances, make minimum payments on them, and throw all leftover money at the smallest loan first.
This appeals to our human psychology. We get motivation and satisfaction from seeing debts eliminated quickly.
The debt avalanche method is where we list all debt by interest rate, make minimum payments on all of them, and throw all leftover money at the loan with the highest interest rate.
This method is the most logically appealing.
It makes the most financial sense, as you will save money by eliminating more expensive debt first.
You’re going to be fine with either of these methods. I just think psychology is a powerful thing when it comes to money. That is why I’m partial to and recommend the debt snowball.
I wish common sense guided most of our money decisions, but that’s rarely the case.
Invest the Max into your Roth IRA
Your matching is taken care of, emergency fund established, and got rid of debt.
No small feat.
The first account to invest in is your Roth IRA.
This account comes before your 401(k) or TSP for a number of reasons:
- Once a Roth IRA has been open for 5 years, you are able to withdraw the contributions (but not the growth) penalty free before age 59 1/2. Not possible in other retirement accounts.
- The TSPs investment choices are extremely limited. Just the G, F, C, S, I, and Lifecycle funds.
- TSP has more limitations on withdrawals than IRAs.
- Military members have a lower tax burden while on active duty because certain parts of pay, like housing, food, and base pay during deployment, is not taxed.
These tidbits makes the Roth IRA an attractive choice.
Dave Ramsey suggests putting 15% into your retirement accounts.
It’s not enough, Dave.
I’ve been meaning to talk to him about that.
You will not reach financial independence quickly, or possibly at all, if you only contribute 15% of your pay to retirement accounts.
I’m a strong believer in maxing your IRA and TSP each year.
The max for an IRA in 2021 is $6,000 a year.
If you make too much money, you may not be eligible to contribute to a Roth IRA. The cutoff for 2021 is $125,000 modified adjusted gross income (MAGI) for single filers, $198,000 for joint filers.
If you have a high income and still want to take advantage of a Roth IRA, consider a back-door Roth. This is a little complicated.
Maxing isn’t easy to do, especially at first, but you will thank yourself (and me ) the earlier you start doing this!
This harnesses the magic of compound interest on top of the advantages of tax savings in retirement accountants.
It’s a double-whammy.
Now let’s quickly address the Traditional vs Roth retirement account choices you make in your IRA/TSP/401(k).
Get my FREE 2-page PDF cheat sheet on the 7 steps to optimal investing in the military.
A traditional retirement account is where you can deduct that amount of money from your taxable income in the year you contribute.
This also means that in retirement when you withdraw the money, that is all considered taxable income. This is an attractive option if you believe your tax rate may be higher now than in your retirement years.
A Roth retirement account is sort or the opposite when it comes to tax treatment.
With a Roth, you do not deduct your contribution amount in the tax year you make it. That money is taxed as normal in the year you contribute.
This means when you withdraw the money after age 59 1/2, you don’t pay tax on any of it! This is attractive if you believe you may be in a higher tax bracket in your retirement years.
This ends up being true for many military members because of:
- An increased chance of being in a higher tax bracket after leaving the military because they may receive a pension after retirement
- A portion of their income in the military was not taxed before retirement, reducing their effective tax rate
As far as how to invest, that’s too large a subject to get deep into here.
I believe the best method is picking a simple investing strategy using index or mutual funds and sticking with it over the long-term.
Don’t jump in and out of different investments based on what you hear at the water cooler.
I go much more in depth on how to invest in the following post:
Invest the Max into your Roth TSP/401(k)
I talked earlier about some of the advantages of investing in a Roth IRA before the Roth TSP.
Those are compelling arguments, but if you had some strong preference to do TSP before IRA, so be it.
Your still better off than 99% of military members if you end up maxing both in any order!
If I had to pinpoint my biggest financial mistake, it would be not contributing the max to retirement accounts earlier in my career.
The yearly contribution maximum for TSPs or 401(k)s is quite a bit higher than an IRA. It’s $19,500 in 2021.
While Roth IRAs have an income limit, Roth TSPs do not, so definitely take advantage of this.
You’ll notice I mentioned to contribute to a Roth TSP or Roth 401(k) instead of traditional accounts.
As I outlined above, Roth could end up being a better choice for military members for a number of reasons, including having a lower effective tax rate than non-military earners.
A Roth TSP or 401(k) can be great for those that earn too much to contribute to a Roth IRA. There is no income limit for Roth TSP or 401(k).
Investing in the TSP can be confusing because what is offered is totally different than what other financial institutions offer.
They have funds that are letters. Each fund corresponds with a similar fund available through typical investment firms. Here’s a chart:
- G Fund – Investment in U.S. Treasuries
- F Fund – Mimics Bloomberg Barclays US. Aggregate Bond Index
- C Fund – Mimics S&P 500 Index
- S Fund -Mimics U.S. Completion Total Stock Market Index (small and medium U.S. companies not included in the S&P 500 Index
- I Fund – International Fund focused on larger developed economies
- Lifecycle Funds – A tailored mix of G, F, C, S, and I funds that slowly adjusts to more conservative over time
For most of my career, I invested simply in the S&P 500 index. I currently invest in a 50/50 split between the C fund and S fund.
There aren’t tons of choices for how to invest in the TSP, but I’ve compiled a list of several of the best methods. Some were recommended from top money gurus.
Open a Taxable Brokerage Account
Once you’ve knocked out debt and taken advantage of tax-advantaged retirement accounts to the max, it’s time to start putting money in a “normal” or taxable brokerage account.
These accounts are different than retirement accounts in two important ways.
- You can put in and take out as much money as you want anytime and at any age
- The money made in these accounts is taxable income.
These accounts, just like IRAs, will allow you to have most typical investments inside such as stocks, mutual fund, exchange traded funds (ETF), and many others.
You should also invest in these accounts using a long-term buy-and-hold strategy. Pick something that makes sense to you and stick with it long term.
Here is a great article on more than 150 different methods for investing in your brokerage accounts, IRAs, or 401(k)s.
Invest in Real Estate – Optional
I primarily invested in real estate outside of my retirement accounts (IRA, TSP/401(k)).
I recommend investing in real estate as a road to riches, but it must be done correctly and responsibly.
The reason I say it’s optional is because using long term buy and hold index fund investing with a historic long term payout of between 7-10% is already enough growth to make you rich.
Not to mention it’s zero work.
Real estate is more work, more of a learning curve, and more risk, but you just might outperform your other investments.
There is a part of real estate for military members that is mandatory.
That part is not making the two deadly real estate mistakes I see military members make all the freaking time.
If you make these mistakes, they can slow you down or even stop you from reaching your eventual goal of being rich in the military and having financial independence.
Those two huge mistakes are:
- Don’t buy homes in high cost of living areas
- Don’t buy a home at every duty station.
The most important advice I’ll give for real estate in the military is this:
Don’t buy a home in the military unless it will cash flow well as a rental property when you leave.
I get into more specifics about real estate in the military in the following article:
There it is.
Follow these 7 steps and you will become Rich on Money and Rich in the Military.
Rich on Money