Savings Deposit Program

For many, the perk of a deployment is the extra money you will be making.  Combining basic allowance for subsistence, hostile fire pay, separation pay, and a tax free paycheck makes for a nice increase in pay.  But there is another way you inflate your pay while deployed, the Savings Deposit Program (SDP).  The SDP allows for service members to deposit up to $10,000 and earn interest at a 10% rate, compounded quarterly while you are deployed, and an additional quarter upon your return from deployment.  Many of the service members I have talked with about investing have been scared to invest due to the potential loss of principle.  If you are in this boat, then pay attention.   There is no risk.  The SDP is possibly the best no risk investment out there.  As of today a one year Certificate of Deposit will yield just over 1% and I Series US Savings Bonds are currently yielding 2.2%.  

So how much can your investment in the SDP yield?  Well let’s just do a quick calculation of $10,000 placed in the beginning.  Then compile your money at 10% quarterly for five quarters.  Four quarters for your yearlong deployment and the fifth quarter is for the extra three months it can collect interest after you return from the deployment.  In the end, you pocket  an extra $1,314 when you collect your money back.

 I hope by now the free money with no risk has captured your attention.  So let’s get you qualified to start investing.  To qualify, you must be deployed to a region where you will qualify for hostile fire pay for a minimum for thirty consecutive days or at least one day of three consecutive months.  The thirty day requirement gives yourself some time to get your finances straight and see how much money you can invest.  You do not have to invest all of your money in the beginning.  Instead you can add to your investment every month with an allotment.

You can collect the funds back upon completion of your deployment.  The funds will be direct deposited to your account after 120 days redeployed.  If you would like to request your money sooner, you can request the funds with your MyPay account.  Under times of emergency, you can request your funds while still deployed; making this a safe and liquid investment opportunity.

Now you have decided to start your SDP where do we begin?  Simple, meet with your unit’s S-1 or your local finance office to begin your investment. 

Check back in about a week when I will have a review of a new peer to peer lending research tool called Number Whale.  As with any form of investing, having the ability to perform research gives you the edge.  Follow the link to their site to pre-register and receive discounts at their October launch.

Become your own Bank

Advertisements surround us showing great 1.05% interest rates on Certificate of Deposits (CDs) and savings accounts.  Meanwhile, the same bank is loaning your money for a personal loan at rates over 12% interest.  Doesn’t seem fair right?  Especially when you consider inflation, then you are just losing money by saving. 

So what can be done to curb this trend?  How about becoming your own bank?  The idea sounds expensive, but about a year ago I saw a report on a company called Prosper Marketplace who provided peer to peer lending.  The idea sounds simple enough, take out the bank and the barrower gets a smaller rate and the lender gets a larger rate.  On paper, everyone wins.  I was quickly excited to try this idea back then and I was hit with the problem of being stationed in a state who did not allow for peer to peer lending.  Just over a month ago, I saw another article on this company and decided to give it another shot to see if regulations have changed.  Unfortunately the citizens of this state cannot use the product, but instead Prosper has added a way to check a box if you are military and provide what state you are from.  Great! They have created a work around for those displaced due to military service.  So my account became funded.

Looking around the program, the interface is rather simple to use.  In a way it feels like Facebook as I browse the profiles of people requesting money for loans.  The reasons people need money are endless.  But like I said, this is like Facebook, and talk is cheap.  Prosper does require the lenders to provide a copy of their social security card, photo identification, proof of income, and other documents to prove the person is who they claim to be.  Additionally, the lender is able to see a current credit report on the borrower to see information such as delinquencies, credit card usage, inquiries, and credit score.

I would like to toss out a word of caution.  The website may attract investors to choose higher risk investments because of the high yields and deter investors from the safer investments due to the lower yields.  But the reality is that people can and will default on these loans.  Just like the stock market goes down, so can this investment.  It is not a sure thing. 

So what can you do to mitigate the risk?  There are plenty of blogs out there providing advice on how to play the game.  Some people talk about the character and sincerity of the person requesting the money.  At the same time they discuss not investing in people who do not provide information.  That may be your thing, who knows.  But again, my opinion is that talk is cheap.  I can ask for a loan to pay for my son’s college tuition, but then use it to go on a cruise.  I have discovered in my month as a Prosper lender an amazing site, www.lendstats.com.  This site allows you to query all of Prosper’s data since they converted to their current system.  Since this 3 years worth of data, and 3 years is the most common loan length, you can get a historical data on what is safe and not.   I by no means am giving advice on how to invest your money, but some things to look at are new borrowers to previous borrowers, numbers of inquiries, number of delinquencies, and so on to see how loans have performed.  Additionally, you can look at other users’ accounts and see how they have invested to learn from their successes and mistakes.  Or even see where you are going right and wrong in your own account.

An additional mitigation tool is diversification.  Prosper’s blog provides data reflecting since the change in their program three years ago, all lenders with over 100 notes have some form of positive growth.  Wow, 100 notes, which must cost a lot.  But actually it doesn’t.  The minimum amount you can pledge to the loan is $25, making it cost only $2500 to own 100 notes. 

To me, the process is painful at first, as I am big into the stock market.  I like to see my money change every second.  But initially, Prosper moves at a slower pace.  When a listing is posted it has fourteen days to collect funds from the lenders.  Once the loan is funded, it can take another seven days to have the borrow provide the required documents, and be verified by Prosper’s personnel.  So three weeks could potentially by before you can begin to collect interest on your investment.  But when you have a three year loan and average out the wait time, it becomes 51 weeks a year of interest.  Not so bad after the wait.  In fact the stock market is closed for holidays making the wait comparable. 

And additional wait is the fact you are investing into a loan.  The person receiving the money isn’t going to pay you back right away.  There becomes a 30 day wait before the first payment is due to you.  This is why I have decided to write this blog today.  My 30 day wait will come due on Friday and I will begin to collect my little bundles of money.  If you have over 100 notes, then everyday will be a pay day.

After this first month, I have learned a lot.  One thing to remember, this is like investing in the stock market.  Your intent is to make money.  Earlier, I mention people talked about the importance of what they place in the loan’s listing.  Personally I believe in historical numbers.  If you play the stock market on emotion, you will get burned.  If you invest on emotion, and not numbers, you will probably try to buy stock in Enron after Ken Lay said it was a good idea. 

I will continue to update on my success as a bank.  Please feel free to give it a try.  It is completely free to lenders and it is free for borrowers to list a loan. 

What does your credit report say about you?

Reviewing your credit report is the easiest proactive means to protect your identity, but for some reason it is rarely done.  We are bombarded with many advertisements informing us on FREE means of obtaining your credit score.  Unfortunately, knowing your credit score is insufficient to protect yourself against identity theft. 

So what is the difference between your credit score and your credit report?  Your credit score is a number used by creditors, such as a bank, to judge the level of risk to loan you money.  From this number they derive the interest rate at which you will be charged. 

Your credit report, on the other hand, is the information used to calculate your credit score.  Information on the credit report includes lines of credit, delinquent payments, and inquiries for credit.  What should you be looking for when you are reviewing your report?  The simple answer is anything you do not recognize as your usage.  When your identity has been jeopardized, the thief will open up lines of credit and not make any payments.  As you review your credit report, look for any inaccuracies so you can immediately contact the creditor about the potential fraud.   

Congratulations, you have decided to check your credit report.  Which advertisement should you listen to so you may obtain your free credit report?  You may be surprised, but the answer is NONE of them.  Instead, www.annualcreditreport.com was created to provide consumers with one free credit report from Equifax, Experian, and Trans Union each year.  Not every creditor reports to all of the big three agencies.  Therefore it is important to check your report from all three companies.

Before you go and pull all three reports at once, check out this little trick.  If you pull one report now, then wait 4 months then pull you second report.  After waiting 4 more months, pull the final report.  If you are counting months on your fingers, you will run out so I will do the math for you.  After waiting four more months, your original credit report will have been a year.  This means you can pull the first report again for free.  With this schedule, you will be able to pull three credit reports each year for free.

You work hard to build your reputation and as such it is important you protect it.

Identity Theft For Dummies - Amazon.com

Changes to the Thrift Savings Plan

Currently the Thrift Savings Plan (TSP) acts similar to a traditional Individual Retirement Account (IRA) in regards to the tax benefit.  TSP is currently working on phasing itself to provide a Roth benefit to TSP accounts which will make the accounts act similar to a Roth IRA.  Marines are currently able to take advantage of this transition.  Starting July 2012 civilian federal employees will be able to take advantage of the program.  Soldiers, Sailors, and Airmen will begin taking advantage of this program starting in October 2012.

For information on the Pros and Cons of traditional and Roth, please see the blog about IRA accounts.  Additionally consult with your accountant to see if the conversion is appropriate for your retirement goals.

TSP Investing Strategies: Building Wealth While Working for Uncle Sam - Amazon.com

Rule of 72

In a previous blog I discussed the power of compounding interest.  But how long does it take until your money doubles?  This is a common question, and should be as the point of investing is to increase the value of your money.  There are calculators you can easily Google which will calculate how long it will take to double/triple the value of your account, but there is an easy way to calculate an estimate.  This is called the Rule of 72.  It is a really easy way to estimate the time required to double your investment.  To perform the calculation, simply take 72 divide it by the interest rate (in percentage) of your return and the answer will be an approximate in the number of years to double your investment.

72 / 9% = 8 years

Remember, this is merely an estimate.  The actual time required to double your investment at 9% is 8.043 years.  Not too far off of an estimate.

Compounding Interest

Looking back to when I was a private, there were several retiring First Sergeants and Sergeants Major who were trying to instill their parting wisdom upon the minds of those who will replace them.  One message they all shared was to save, and start now.  Not being to financially savvy, they talked about starting a Thrift Savings Plan (TSP) as it was a new program Soldiers were allowed to participate in.  As these senior Soldiers were looking toward retirement, they did not want their subordinates to make the same mistake of not taking advantage of compounding interest.

Interest is the profit you can make from investing your money.  Let’s do some simple math to see how this works.  Suppose you have $10,000 to invest and place it into a program yielding 10% interest.  After 1 year you will have made $1,000 in interest, and have a total of $11,000.

$10,000 x %10 = $1,000

So how does compounding interest differ?  Well you aren’t going to stop investing after that one year.  Now on year two we still have our original $10,000 and our earned $1,000, all of which is earning 10%.  Again our $10,000 will bring in another $1,000, and the previous earned $1,000 will bring in $100 for a total account value of $12,100. 

$10,000 x %10 = $1,000
$1,000 x %10 = $100
$10,000 + $1,000 + $1,000 + $100 = $12,100

Why should you start saving now? The longer your money has a chance to grow the more it will work for you.  Let’s imagine you have just completed basic training and there are twenty years ahead of you until you are able to retire from the military.  In our scenario you will be placing $400 a month into a Roth IRA account from now until you retire.  Doing simple math, $400 x 240 months will mean there is $96,000 in your investment account.  But what would all of that money do if it was compounding interest for you?  I am now going to adjust the scenario to earn an average of %10 a year.  After doing some computations, your account would have the $96,000 you contributed plus an additional $207,747 in interest for a total of $303,747. 

But what about your senior leader who is getting ready to retire and has only five years left in the military?  Running those numbers of $400 x 60 months you would only have $24,000 in contributions.  After letting this money compound for the 5 years, the total account value would be $30,974.  That means less than $7,000 interest earned.  Looking at these numbers, you can see why your senior leaders wish they could go back in time to when they were a private and begin saving then.

Earlier I mentioned in our scenario we would be placing this money into a Roth IRA account.  Just because your service in the military has ended doesn’t mean you can start taking deductions from your IRA. Suppose you enlisted into the military at 18 and served 20 years, you would still have another 21.5 years until you are eligible to use money from your IRA.  What would your $303,747 be at that time without any additional contributions?  Using the same interest rate as above, your account would value $2,280,750!  Wow, who would have thought being a Soldier would make you a multimillionaire? Best of all since you were placing these funds into a Roth IRA account it’s also tax free.

Please consult with your accountant for your unique situations.

A Beginner's Guide to Investing: How to Grow Your Money the Smart and Easy Way - Amazon.com

Individual Retirement Accounts (IRA)

How would you like to save money and keep Uncle Sam’s hands off of it?  Individual Retirement Accounts (Commonly referred to as IRA) are a great way to plan for the future while sheltering your savings from the tax man.  There are two common types of IRA accounts, the traditional IRA and a Roth IRA.  Both accounts have benefits and there is no simple answer as to which one is best for you. 

A traditional IRA allows for contributions of up to $5,000 a year.  Contributions made to your IRA account are tax deductible.  All earnings made within your IRA account are deferred until you make withdrawals from the account at which time you will pay the taxes on the amount of money withdrawn from the account. 

The Roth IRA also allows for contributions of up to $5,000 a year.  Where the two accounts differ is how the account is taxed.  Roth account contributions are not tax deductible.  But like the traditional IRA, the earnings within a Roth IRA are shielded from taxation.  Additionally, when deductions are made from a Roth IRA, they too are tax free. 

For those of you who are late bloomers on saving for retirement, you are in luck. An additional $1,000 in contributions is authorized for those ages 50 and up.

With both programs offering great benefits, there must be a catch right?  Well the catch is the simple; you can’t touch your money. Well that is until you are 59.5 years old.  I know some of you who were skeptics about IRA’s are now losing interest but please remember it is a retirement program and there are always exceptions to the rule.  Some of these exceptions are purchasing a home, having a disability, medical expenses, and long term unemployment.  If you don’t meet one of these exceptions and need to withdraw money prior to 59.5 years of age, you are still able to do so, but at a price.  You will be taxed on the amount of money you have withdrawn at your tax rate, and incur a 10% fee for the amount withdrawn.

So you have made the decision to start saving for your (and your family’s) future, but don’t know where to start.  The easiest place is to make an account is with your favorite financial institution.  Many investing firms offer both traditional and Roth IRA accounts that are easy to start online.  Each firm offers different rates for trading.

From my personal experience with talking with fellow Soldiers of all ranks, finding $5,000 to contribute to an IRA account is difficult.  The reasons I receive for why they can’t start saving are all too common.  If you are thinking of a reason now, I am sure I have heard it.  But you need to start saving for your future, because no one else is going to.   When I was a junior enlisted Soldier I couldn’t afford $5,000 a year.  Instead I could afford about $100 a month and created an allotment to save automatically.  A few months later I received a promotion, a pay increase of about $50 a month.  So I increased my allotment to reflect my pay raise.  After a few years and several pay raises later, I was able to get my monthly allotment to $400 a month.  You can establish an allotment with MyPay to have the funds sent directly into your IRA account.

Please consult with your accountant for advice unique to your situation.

Saving for Retirement without Living Like a Pauper or Winning the Lottery, Updated and Revised - Amazon.com

Welcome to Military Money Wise

While at work a fellow Soldier noticed I was on an investing website.  He asked me if that was the best place to invest.  I related to him there is no “best” way to invest money as the definition of “best” differs from each individual.  This Soldier went on to state he has saved up $20,000 (I was impressed being he was a married junior enlisted Soldier) but lacked the knowledge of what to do to make his money work for him.  I explained several investment opportunities from traditional investment accounts, Individual Retirement Accounts, Thrift Savings Plan, Peer-to-Peer lending, and purchasing Real Estate.  The aim of this blog is to provide advice to fellow Service Members so they can make educated decisions on topics of investing, debt consolidation, and planning for your future.  If you have any topics you would like me to discuss, feel free to send an email.