Financial Readiness

A Teaching Framework for Company Grade Leaders

By MAJ(P) Michael D. Pritchard

Article published on: July 1, 2024 in the 2024 Issue 1 of the Air Defense Artillery Journal

Read Time: < 26 mins

Soldier readiness is the cornerstone of military effectiveness. A ready force is a lethal force and we are in the business of providing viable military options to our civilian leadership. Leadership at all levels build, maintain and monitor readiness across various dimensions such as training, medical, physical fitness, morale, administration and maintenance.

Financial readiness is often left at the fringes of this system or hastily completed during deployment preparation. Soldiers receive one-on-one guidance on how to fight and correct their equipment, while the average one-on-one financial discussion is typically spawned by an S2 blotter report and a visit by the security manager.

Financial readiness often takes a back seat and becomes a persistent seam in holistic readiness. Closing this seam requires engagement at the company grade level vice large, formal and ultimately ineffectual briefings. Financial readiness is an ideal subject for short and informal discussions with subordinates, assuming of course one has a framework and a baseline level of knowledge. This article will provide a framework that highlights five positive and five negative (5 x 5) financial behaviors with descriptions of each behavior, footnotes for key context and references and close with implementation recommendations. This 5 x 5 framework is designed to arm company level leadership with the basic tools to engage on this topic and hopefully spur financial self-development. At the very end, a 1-page executive summary is provided.

Before diving into the 5 x 5 framework – two key terms must be discussed: money and wealth. Money is liquid1, easily convertible and is the primary mean of exchange. You can save money, but it is not wealth as it loses value as inflation2eats away purchasing power,3and by itself it does not generate more money. Wealth is an asset that generates money or grows in value in cash denominated terms.4A rental home that generates income and grows in value is wealth, a stock that pays a dividend or increases in value as future cash flow projections improve is wealth. A car is not wealth and generally decreases in value each day, nor are items like TVs, clothes, or jewelry actual wealth.5Speculative assets like bitcoin, altcoins, NFTs, Stanley Cups are not wealth.6Wealth generation requires delaying consumption now to create greater opportunities for consumption in the future by investing. You can have one thing now or two things later, assuming you invest your money into an appreciating asset. Time and consistent behavior are the two biggest drivers of wealth creation. The next section will highlight positive financial behaviors associated with wealth creation.

The 5x Dos

Have a cash management strategy. How you manage cash plays a big role on how much you should invest. Understanding your overall cash-flow will illuminate if you cash-positive (growth) or cash-negative (loss). A common cash strategy is to lump cash into a checking account and a portion to savings without any further thought. For those in a cash-positive position this leads to excess cash holdings in a low-interest account and leads to cash losing at least 2% of purchase power per year due to inflation. For those in a cash-negative position, they might not perceive that outflows are eating into savings – especially if the negative out-flow of cash is low. A more optimal method is to allocate portions of each paycheck to three distinct tiers: an emergency fund in a high yield savings account, a savings account and a checking account. The emergency fund tier should ideally contain six months’ worth of expenses or at least have that as an eventual goal. Leveraging a high yield account reduces the impact of inflation while maintaining immediate access to the funds. A certificate of deposit or market fund are not as accessible and thus not suited for emergencies. The savings account tier should be used to save cash for defined future uses. If you are sitting on a pile of cash (this is a good problem to have), it is better to invest a portion of it than let it lose value. Set a benchmark that corresponds to a future objective like a down payment or vacation, then invest any extra dollars above that. The checking tier is simple – after balancing or least approximating the balance of your account, leave a ‘float’ amount of cash that serves as both a buffer for unexpected expenses and fees from not balancing your checkbook correctly. If one is unable to allocate to each tier or must regularly pull money from a non-checking account – there is likely a cash flow problem that needs to be analyzed.

Plan for Retirement. Saving for retirement at the earliest possible moment is highly recommended. In a perfect world one would start a retirement account the day they become eligible. These types of accounts maximize the growth of investments, especially if assets are growing for 40 years. The time it takes for an asset’s value to double is 72 divided by the whole number growth rate. For example, if an investment account averages a 10% annual return, then the doubling time is 7.2 years. $1000 saved today would be worth about $38,000 in 42 years assuming 2% inflation and a 10% annual return. At some point in life income from work will drop to zero, unfortunately expenses will not. The two main vehicles to save for retirement are a 401K (TSP – Blended Retirement Plan) account and a Roth IRA account.7 The 401K Plan for military members is a portion of the Blended Retirement Plan called the Thrift Savings Plan (Roth-TSP).8 All Soldiers are automatically enrolled in the program with a free 1% of base pay contribution made by the government. Members are automatically enrolled to contribute 5% of their base pay and after 2-years of service the government will match an additional 4% of base pay – resulting in a 10% total contribution of base pay. The Soldier’s contribution of 5% in this case would also lower their taxable income by 5%, so as contributions increase, the overall tax bill will be lower.9 Of course, when funds are withdrawn later in life (typically after 59 ½ years of age) taxes must be paid on the capital gains. This program is an outstanding way to build wealth over a career. For example, if a new enlistee just did the minimum contribution and retired at 20 years as an E-7, the TSP benefit would be worth $1.2 million at age 60. I encourage leaders to council their Soldiers not to stop contributing to this program and even increase contributions if possible. The Roth Individual Retirement Account (Roth-IRA) is another investment tool with some key differences from the Roth-TSP. The IRA is funded with after-tax dollars, but the withdrawals are not taxed in the future. There are yearly caps to how much can invested (2024 limit is $6,500 per person with some caveats).10 If one started today and maxed out contributions for 40 years, the future value would be close $3.5 million (worth about $1.5 million in 2024 dollars) tax free.11 This is a great tool to avoid huge taxes in the future as investments are cashed out.

Manage Credit. A credit card is the optimal tool to make purchases due to their consumer finance protections, which are far superior to debit cards.12 The trick here is to pay the credit card bill in full each pay period. That simple. Do not carry any credit card debt! As a credit profile improves, companies will begin to offer additional cards with or without an annual fee to get a client to spend more and eventually carry a balance. Leverage this opportunity to apply for superior credit cards but remember the key task: pay the bill in full every month. Chase and American Express are ideal vendors to research for obtaining credit cards. They have a liberal reading of the Service Members Civil Relief Act and the Military Relief Act and will often waive the annual fees to their credit cards.13 In the end, credit card management is about keeping it simple: don’t carry a balance, don’t stack up multiple annual fees, don’t stack up so many cards you lose track of due dates. Other aspects of credit management are not so simple. Many businesses and credit card companies offer payment plans for large purchases, sometimes with or without a finance fee. Utilizing too many of these types of plans will consume monthly cash flow and inhibit investing. The combination of a car payment, house payment, installment payment, credit card payment and student loans can quickly eat up every last dollar. A way to avoid this trap is to set a savings and investment benchmark and of course some classic discipline. A savings and investing benchmark of around 30-45% gross income is a fair target. Anything over 50% starts getting into quite spartan living and may not be sustainable over the long term – especially if you have a family. The discipline to not spend takes time to build. The goal is to have the act of investing feel better than spending.

Invest for a Better Quality of Life. There are other reasons to invest besides retirement. Delaying spending now to have more money to spend later, let’s say to travel, buy a house, start a business, requires investing into assets that grow in value. A simple way to do this is to set up a taxable brokerage account (Schwab, Vanguard, etc.) and periodically invest into the stock market. Real Estate is another method, but for the sake of simplicity this article will focus on the stock market. The absolute simplest, proven, risk-prudent and peer-reviewed method to invest into the market is with a total market exchange traded fund (ETF).14 ETFs are index funds that are comprised of stocks that make up markets such as the SP500, DOW, US Markets, or even total world markets. These ETFs diversify investments across multiple markets, geographic areas and product types and deliver historically the best returns over any actively managed funds. Active management (Mutual Funds) and day-trading (to include options) statistically perform far worse than passive ETFs.15 There are many reasons for this, but the two most important reasons active funds perform worse than passive funds: active trades incur taxes on every transaction and nobody has any idea what will happen in the market – or in other terms, active investing is having investments taxed to pay for the privilege of people guessing about the market. Like retirement investing, set a goal, invest each month, then cash out at some point in the future. To invest in a child’s education, start a 529 College savings plan to pay for private school and college16. These plans are managed by states and often reduce state taxable income. The DOD also just started flex accounts for child-care, which allows pre-tax income to be set aside for expenses like the Child Development Center.17 While this isn’t exactly a long-term investment, utilizing it does require some of the same behaviors. Investing for a better future also means investing in oneself. Learning a new language, continuing education, certifications, promotions, are all forms of self-investment that lead to greater earning potential.

Make and Revise a Plan. None of these positive wealth generation behaviors will pan out if you don’t make a basic plan. Start with analyzing monthly pay and expenses. How much is spent and saved? There are dozens of free budget calculators that can help get a grip on cash flow. Think about mid to long-terms plans such as buying a car, getting married, or having children. A majority of those events will cost between $5-10 thousand dollars. Practicing backwards planning from key purchase objectives and life events is critical to saving an adequate amount of money. Learning how to plan takes time and it is okay to refine and revise plans over time. Consider retirement planning, a reasonable plan requires an estimate how much income is needed per year from retirement until death. Think about health costs, housing costs, travel and hobbies, food, for a month. Take that number and multiply it by 2.2 (this accounts for inflation for 40 years) and that is how much will be needed for a month in retirement. From here, research annuity and retirement calculators to determine how much you must invest over time to support your monthly needs. If you have ever seen a synchronization matrix, quarterly training brief, training schedule – you have seen a plan to manage resources and this process no different. Build an estimate of when major events will occur and then backwards plan savings to support those events. Project out permanent change of station (PCS) moves, starting/finishing school, promotions, separation, having kids, buying a house and align those events to age and projected income. This type of forecasting may be difficult, especially if the current financial position is dire – but practice and consistent behavior will make it easier over time. In the meantime, get the cash management plan set up, invest in retirement, manage credit and save today to have fun tomorrow. The next section will provide an overview of common negative wealth generating behaviors.

The 5x Don'ts

Carrying a Credit Card Balance. One of the most common financial mistakes is carrying a credit card balance. A $5,000 credit debt will cost $120 a month in interest alone…as in not one cent of this payment will lower the balance. The behaviors that lead to large balances do not stop just because an entire paycheck is going to payments. Pathological spending behavior is difficult to reign in, especially when cash is not being physically used. While it is ideal to use a credit card to buy everything for the consumer protections and rewards programs, the entire balance must be paid off every month. If unable pay it off that month, save until able to do so. When counseling Soldiers, curing and preventing credit card debt will need to be addressed. Getting out of credit card debt is challenging – you must change spending behaviors and aggressively pay down each card. The Debt Snowball method is very effective in this instance, but it requires focus and discipline.18 Preventing the problem is vastly less expensive than curing it. Encourage your Soldiers to think about the positive financial behaviors when making purchases. Encourage a habit of though that considers cash flow, retirement savings and future financial objectives.

Investing in Speculative High-Risk Assets. Investing is based on the premise that one takes a measure of risk to earn a measure of reward. In the stock market, that risk is the loss of an investment if a company goes bankrupt or if the market tanks. By diversifying in an Exchange Traded Fund, the majority of risk aside from systemic market risk (the risk of basically being alive on earth) is mitigated. In this case the reward of 7-10% return per year is commensurate with the residual risk. It is not uncommon to hear Soldiers talk about crypto currency, options trading and RobinHood accounts. It is very likely those Soldiers are risking a lot of money to make a large gain. If somebody is making a lot of money in a day, that also means a lot of people are losing money that day. Odds are that most people are in the ‘losing money’ category. New financial application (Apps) interfaces make it easier to access financial products; however, these Apps encourage addictive and dangerous behaviors and do not provide any real financial education about what they are doing.19 These Apps enable Soldiers to take large risks using complex financial products in the hope of making a massive return. Social media exacerbates this trend by highlighting the success stories (survivorship bias) and downplaying the overwhelming mass of people who lose money. Listen to what Soldiers are saying and see if they are using these apps and making outrageous bets on the market – intervention might save somebody from a life altering financial catastrophe. Crypto currency (they are not currencies but actually speculative assets) trading is another common financial trend. There is a lot to unpack with crypto (Fiat Money, Inflation, Scarcity, Trust), but the bottom line is that they do not generate income, nor do they have intrinsic value. Crypto markets are predicated on a buyer paying more than a seller previously paid. To get an idea of where this leads, read about the great Tulip Bust in the Netherlands.

Live only for Today (YOLO). Sounds great – buy that business class ticket to Spain or go to Best Buy in a new sports car to get a PS5. Spend $150 every weekend at the bar. Or maybe it’s the opposite, the bills are due and once again there is not enough money. You save and scrimp but ends do not meet and the idea of next month is terrifying. Both of these situations are examples of financial situations that drive short-term thinking, albeit one is more fun than the other. The feeling of endless youth and time to save later has inspired 1,000 books and every 3rd series on Netflix. Well, it’s wrong and it will hurt like hell when reality hits. If you spend all your money now, then you won’t have any in the future. If you never learn how to save and invest you will likely face significant financial challenges in the future. The friends you spend money with now will not be there in the future to give you money. The other side of living in the moment is much darker and difficult to navigate.20 When money is tight for months if not years on end, your desire and ability to plan diminishes. The idea of next month or next year is too stressful and distant to think about, so you close your mind to it. Financial decisions end up being made that satisfy this week or month but will cost you dearly over time. In this place leaders must help instill courage to build a plan to make a better future. It is likely that this situation will require connection to tangible support resources to mitigate current issues; however, it is critical to shape financial behaviors, or the situation is likely to repeat itself. Sometimes buying things is the only coping mechanism we have left. Other times, buying things outside of our range just seems like the default setting.

Live beyond your Means. Credit Cards and Loans allow individuals to live beyond their means for a reasonable amount of time before all the cards come crashing down. Financing a car that is that is more than 30% of your salary is overspending on a depreciating asset. Buying an excessively large house just because you have a pre-approved VA Loan is not a wise decision when you consider taxes, annual maintenance, 10% transaction costs and utilities. Attending a high-cost college when a lower cost state option exists for a career that makes the median wage is not an optimal decision. Constantly buying status symbols such as new clothes, electronics, jewelry and designer makeup will also inhibit wealth generation and leave you poor in the end.

As your Soldiers and junior officers make more in salary they will be exposed to new risks with overspending. They might be able to make the financing payments, but are they able to pay for the maintenance, insurance and cleaning of the item? These sustainment costs are often overlooked when making purchase decisions. Capitalism is not consumption; it is about the generation of wealth (capital). Bad financial decisions add up until all of your income is devoted to paying off debt or you at the point of declaring bankruptcy. This process may take years to unfold. The delayed ‘flash to bang’ of overspending makes it a difficult lesson to learn. If financing prevents you from maintaining a 30%+ savings rate of gross income while also meeting all of your required expenses – you are likely spending too much.

Embrace Mental Money Traps. There are many prevalent fallacies about money, credit, wealth generation and risk. These Mental Money Traps lead people with the best of intentions to make a series of bad financial decisions. One of the most prevalent fallacies is stating a large purchase is an investment. An investment is buying something that generates a positive cash-flow over time. Buying new $450 boots for $400 is not an investment – it is spending $400 on a depreciating asset that has some level of utility value. Returning an item to the store does not magically give you money, it just undoes prior spending. Stating an item is “just $1.50 a day for a year and I can afford it” is wrong. The item is $547.50 right now and it is very unlikely you will earn an extra $1.50 a day to pay for it. Another insidious trap is stating “I can afford this If I trim here for a bit.” A majority of people do not have the discipline to maintain that, nor do they track changes in spending.21 This is going to sound counter-intuitive but thinking “I can just save more” reinforces poor spending habits and decreases the odds you will commit resources to increasing your earning potential. The path to building wealth is more than just saving, as I stated earlier you must also invest in yourself and make more money while also not dramatically increasing spending. Making more and spending more is called ‘Lifestyle Creep’ and will silently eat away your potential investment funds. The final trap I want to highlight is the nihilistic mindset that either the world is about to end, or something is going to happen that ‘crashes the whole system’. It is unlikely you will be able to talk the particular individual out of their deeply held belief; however, you may tactfully explain to other Soldiers that odds are the world isn’t ending.22 Overcoming these various mental traps requires a measure of critical thinking.23 Critical financial decision making is about slowing down and thinking about the purchase from multiple angles, researching alternatives and classic patience. In short, “Do I want to spend a large portion of my income now or do I want the ability easily make this purchase in the future?”

There is obviously more to finance than what I provided in this article. The complexity of the subject is often off-putting; however, focusing on key behaviors will help scope your development and the education of your Soldiers. Financial training is best executed as 1:1 informal events or small-group sessions. The idea is to get engagement on a personal level and help connect these concepts to their daily lives.

Focus on behaviors and avoid going on diatribes about former Soldiers wasting vast sums of money. As you engage with a Soldier, ask them about their 3-5 year plan and if they don’t have one – help them frame one out. The idea is to connect the present to the future. Avoid shaming them for past actions, they cannot be undone but you can help them overcome them with planning. I also recommend not to oversaturate your Soldiers with this topic, spread it out over time and reinforce key ideas like managing cash, paying off credit cards and saving for retirement. Increased engagement on this subject will also lead you to cultivate your financial literacy. Improving your financial skills is easily within reach; the majority of this information may be learned for free at the library.24 A few words of caution though: avoid the financial personalities that write books about getting rich, schemes that advertise generating massive wealth today, or anything that doesn’t sound like a lot of hard work over a long period of time. If making money was easy it would not be worth anything. I also discourage you from making specific investment recommendations. We are not licensed financial planners – give them the knowledge and let them take action.

Notes