9 Principles to Achieve FI Series 2 of 3 | Military Money Manual Podcast Episode 4 Show Notes

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Military Money Manual Episode 4 Transcript

[00:00:00] Spencer: Welcome again, to another episode of the military money manual podcast. I'm your host Spencer.

[00:00:06] Jamie: And I'm the better looking one, Jamie.

[00:00:09] Spencer: In this episode, we're gonna go over the nine money principles to live your life by. These are the nine fundamentals of personal finance that I've distilled after reading every personal finance and investing book, I could get my hands on. They all basically say about the same thing. And if you follow these nine principles, you'll pretty much set yourself up for financial freedom and financial independence. So, in the last episode, we covered the first three, which was spend less than you earn, don't accumulate debt, and pay down your high interest rate debt as soon as possible. In this episode, we're gonna cover why you should save a three-month emergency fund, how to maximize your tax advantage retirement contributions, and we'll talk about remembering that savings rate beats an investment.

[00:01:00] Jamie: All right, so 'emergency fund' may not be a term that people have heard before or used before. So, at a basic level, what is an emergency fund? Where do I keep it? And then what do I use it for before we understand why we need three months of it. 

[00:01:15] Spencer: So, an emergency fund is just cash that you have set aside for an emergency. I was introduced to the concept, I think with a “Total Money Makeover” with Dave Ramsey, and I believe in his baby steps, he talks about saving a thousand dollars emergency fund initially, and then going on to other baby steps, but then you loop back around, and you boost up your emergency fund three, six months to more than a thousand dollars. I pretty much agree with that principle. I think a thousand dollars even a decade after reading that book is still a pretty good target to shoot for, 

[00:01:49] Jamie: It's better than what most people are doing now. 

[00:01:51] Spencer: Right, there's that study that always blows our mind. Where is it 40% of Americans or 60% Americans? 

[00:01:57] Jamie: It, 60%.

[00:01:58] Spencer: Can't come up with $400 in the next two weeks to cover an emergency. So, by having a thousand dollars, you've already put yourself way ahead of tons of people. And being able to- not having to rely on borrowing money from friends or family or from payday loans or credit cards- you can basically smooth out life's bumps, right?

[00:02:19] Jamie: Yeah. In our first episode we talked about once recently for us where our car broke down. I had to throw some money at that repair. It was like $2,100. And having the emergency fund, it was no big deal. 

[00:02:31] Spencer: Right. And then you just boosted your emergency fund back up to its previous levels afterwards. And how long did that take? 

[00:02:36] Jamie: Just until the next paycheck paid, like a day, just depending on how much cash we had sitting around. One point of clarification, when you say cash, do you physically mean a folders can of cash under your mattress or just something liquid in a bank where it's readily available? What do you recommend on that? 

[00:02:52] Spencer: What I would recommend is holding it in either cash or what financial gurus will call cash equivalence. So, certificates of deposit are another good place to hold them. A lot of people recommend holding them at a separate bank than your primary bank. So, for instance, if you use USAA for most of your banking, hold your emergency fund at ally, I don't necessarily do that.

I do have a separate account for my emergency. Again, it's all psychological, right? A lot of people like having the emergency fund at a separate bank. It just adds that extra layer of ‘I'm not going to spend it' friction to access it. If you see the money sitting there, it's really tempting to be like, ‘I've been saving for this new car or this new bike and I could just, I got this money right here. Why not just grab it?'. But when you do that, inevitably, something will happen in the next week or two where you'll be like, shoot, I really wish I had that emergency fund. 

[00:03:45] Jamie: Exactly. Yeah. 

[00:03:46] Spencer: So, in the military, we are lucky that we have a very steady paycheck other than occasionally the government shutting down where Congress can't fund the ” Continuation Funding Act” or whatever it is. Our paychecks are pretty much protected and even most of the time when they have those kind of government shutdowns, usually the first resolution that's passed is pay the military, and then figure out the rest of the budget. Other than the coast guards. That was interesting last time because the coast guards under the Department of Homeland Security actually didn't get paid, I think for two paychecks. USAA actually kind of dropped the ball on that one, because most of the time, if you don't get paid then USAA, or whatever bank- I think actually Navy federal did step up and said, we'll cover your paycheck, and then you just pay us back when you get your paycheck no interest rate. So, I think it helps when you're saving for an emergency fund or you're building an emergency fund, to think about what would I actually need it for. And that can be different for each person.

So, if you're a single airman living in Ramstein Germany, for instance, maybe all you need is just $1,200 so that you can buy a roundtrip ticket at the last minute.

[00:04:54] Jamie: Right. For sick parent or something. 

[00:04:56] Spencer: Exactly. Yeah. Or maybe it's a car repair. So, if you drive an older car, maybe you just need to have a little bit of cash set aside so that like, you know, when you had your car break down, you were able to cover a $2,100 car payment and didn't move the needle at all. It didn't materially affect your life at all. 

[00:05:13] Jamie: For sure. One of the other things I've seen people do is, like you mentioned, a high yield savings account bank, like Ally Bank or something where they're getting a little bit of money off it. But remember the point of an emergency fund is not to be making a lot of money off of it. You mentioned “Total Money Makeover” and in Dave Ramsey talks about how it's an insurance policy, not an investment. So don't be worried, trying to make 8% off this money, it's there as an insurance. Which, when you're paying insurance, it means you're losing money for the protection of having that and not having to go back into debt should something come up. 

[00:05:44] Spencer: It's essentially self-insurance. Is what you're doing. And like you said, if you think about it as insurance, well, insurance is literally money that you pay to cover yourself for hopefully very rare instances. I found though that with an emergency fund it, when you have it, it seems like there's not so many emergencies. 

[00:06:01] Jamie: It's funny how that works. Isn't it? 

[00:06:02] Spencer: It's weird how that works! But I think a lot of that is because the habits and principles that you need to apply to your own life and the psychology of someone who is thinking ahead far enough to be like, ‘ what if I just set a little bit of money aside, I don't worry about getting an 8% return on it, and then I just have it ready in case anything happens?'. Well, once you start building those habits, all of a sudden you realize, anything that pops up I'm ready to cover, I'm ready to take care of it. 

[00:06:29] Jamie: And you're able to quickly adapt and adjust your priorities and maybe the paycheck that's gonna come out two days after or something, and you can cover it until that and then just shuffle your priorities a little bit. But also, it being liquid is important because you don't want to be without it, and you want it to be lower risk. So, if you're investing in the stock market and you have an emergency right at the beginning of coronavirus, then your emergency fund is gonna be depleted significantly. So be careful with that as well. 

[00:06:56] Spencer: And that's how people get in trouble, is when they mix insurance products with investment products. And if you think about the emergency fund as an insurance product, you want it in the most stable US Treasury Bonds, Tips, and if you really want to get fancy, Inflation Protected Securities. Certificates of Deposit are actually a really good place to go, and some people are hesitant of it because they might have an early redemption fee or penalty. But usually if you look at it, all you're doing is you're forfeiting like a couple months of interest.

[00:07:26] Jamie: Yeah. You're forfeiting a percentage of the interest you've earned, and you can get the money you've put back- most of the time I think are set up like that.

[00:07:32] Spencer: You get a hundred percent and usually you get some of the interest. You just, maybe instead of if you had it there- if it was a two-year CD for instance- it might have a six-month penalty clause where if you take it out after a year, you only get six months of interest. The way interest rates are right now in 2021, that won't be that much money. I mean, it's hard to find a CD that pays higher than 2%-3%. 

[00:07:52] Jamie: Even a high interest bank doesn't really exist right now. Most of them are 0.4% and stuff like that. But just two years ago, you could get 2.75%, or something like that on a savings account. And that would be a great spot.

[00:08:05] Spencer: Well, I remember when I took on my USA Career Start Loan in ROTC in 2008, just as the global financial crisis was coming around, I was able to lock in five-year CDs for 5%. So that was great. And the loan was only 2.99%. So, I was making 2% on arbitrage right there, but that's harder to do these days. 

[00:08:26] Jamie: Is there ever a time where we would want more than three months emergency fund? So, I know we kind of use that as a guide, but maybe a life event, like you're separating, or you're having a second kid, so you know your spouse is going to stop working so maybe you stash a little bit extra in there?

[00:08:40] Spencer: Yeah, definitely. I mean the three months recommendation that I make in the book “The Military Money Manual”- which will be available on Amazon and the website “militarymonrymanual.com”- the three months that I recommend is really because military pay and military lifestyle, besides the random TDY's and deployments that get dropped on us with almost no notice, it's pretty predictable. You know you're gonna get paid on the first and the 15th and if there's any kind of separation or you're getting kicked out, you usually have at least six months, sometimes they up to a year of warning, and you can kind of plan for it.

So yeah, separation is definitely a time where you might want to dial back your investment contributions a little bit and dial up your emergency fund. And maybe instead of having a three-month emergency fund, which when we say three months, we're talking about covering three months of expenses. So, it's not necessarily three months of income. Say someone spends $4,000 a month under rent, food, car, all their various expenses- and you can adjust it too. So, let's say, well, if I had a real emergency, maybe I don't shop at whole foods and I do more Costco shopping. Or if I lost my job, I would cancel Netflix. You can kind of adjust your budget and say, ‘ what is the bare minimum here?'. You know, rent, food, health, transportation. There's like, maybe you're not going on vacation for a week if you're losing your job.

So that's kind of why I recommend the three months. Because I think it's enough to cover anything you need. It's a good for anybody who's like, I don't know what to do. For myself personally, initially it was $5,000. I just liked it was a nice round number and it would cover a thousand dollars car repair, round trip tickets home to either my family or my wife's family and our living expenses were very lean back then, so it would cover that as well. Now the number in my head is $10,000. But again, it's completely dependent on the person. It's what can you sleep well at night with? For some people it's having $10,000 sitting around in a savings account getting 0.01% when they could have it in the stock market getting 8%, they're like, ‘ I have to leave $5,000 of it in the stock market.' But again, like $10,000 is not going to move the needle. It's probably, at least for me, better to have the money set aside that in an emergency, I can access that cash immediately and I don't have to worry about selling stocks when they're low, or capital gains tax or anything like that.

[00:11:01] Jamie: I've seen a lot of people worry about what is the right number? And I think that's a good conversation too of don't worry so much about whether $5,000, $10,000, or maybe even $30,000 is the right number for you. If you're not sure, you can start somewhere, start something, do something. Adjust the number later. Like, say that you thought at one point you wanted $30,000 of emergency fund, when you looked at three to six months of expenses or whatever. And then later on you reevaluate your expenses or you double check your math and things change. You move to a lower cost area, moving from Hawaii to Alabama, for example. Something like that. And that will change my numbers. Ours is a little higher right now because as I came up on my active-duty service commitment, we bumped up our emergency fund to be able to cover a break in employment where if I were to go to an airline and not get hired for six months, then we would have that set aside. 

So maybe that's, uh, another scenario where there's going to be a break in employment after separation or, your first couple years at your next job, you don't expect to make as much as you're making now. Something like that you can cover with some extra savings in your emergency fund. You have lots of options.

[00:12:03] Spencer: Yeah. One thing that a lot of guys do is get out and use their GI bill. And that has a BAH component to it. But if you've been diligent and you've, let's say you only do a four- or six-year enlistment or active-duty service commitment and at the end of it, you've got several thousand dollars saved up that you can basically just live on while you go to school and supplement your GI bill. And you can have a great time because you're going to school, you're get an education, but you got this money saved as well to support your lifestyle and you don't have to live student poverty. 

[00:12:33] Jamie: And we talked a little bit last time about the psychological and emotional benefits of it. Just having that emergency fund, when you have it set aside, you seem to not have as many emergencies because you can handle a lot that comes your way. So, three months of emergency savings and it just takes a little bit of the stress of budgeting and life and Murphy happening.

[00:12:52] Spencer: That's right, have got to watch out for Murphy. All right. So, we talked about saving a three-month emergency fund. We'll move on to the next of the nine principles and that's maximizing your tax advantaged a accounts. And really what we're talking about here is retirement accounts. So, for most military service members, your primary retirement account is gonna be thrift savings plan or the TSP. And then you also have access to individual retirement arrangements or individual retirement accounts. Also known as IRAs'. These two types of accounts come with in two different flavors. So, it can get a little bit of confusing with some of the terminology. But if you just think about anytime, you hear a Roth, whether it's a Roth TSP or a Roth IRA, you're paying the taxes now and then when you're in retirement, you don't pay taxes on that money, and its growth. So, the deal that the federal government is saying you are allowed to put money into this account that you pay taxes on. It can grow hopefully over 40 or 50 years at a good 8% return, and it doubles four or five times. And then in retirement you can pull the money out and you don't have to pay taxes on it.

So that's a really good deal, especially for military service members, because our tax rates are so low. And so much of our income is untaxed allowances like BAS, BAH- I think flight pay is- living allowance, for sure. 

[00:14:19] Jamie: Anything with allowance in it is non-taxed income. And quick plug for episode two was an entire episode about the TSP. So, if you haven't listened to that yet, that one was a long one, almost an hour, all about the TSP and the different options you have there.

[00:14:33] Spencer: Yeah, and then we talked about Roth. So, Roth you're paying taxes now. So, you can have all four of these types of accounts, but the other flavor is traditional. So, in the traditional retirement accounts, you skip paying taxes now and you pay taxes when you're in retirement.

So, when you pull the money out after age 59 and a half, you pay income tax on it and you might wonder, why would anyone do that? And the reason is as you make more money and you move up the tax brackets, your income while you're working is usually higher than your income when you're in retirement, because when you're in retirement, you're not working for money anymore.

So, you're drawing down your retirement savings. And so, the tax rate, if you can defer paying the taxes on the money that you're making now- and this we've talked about in the TSP episode- this usually kicks in if you're, let's say a dual mill, 03 to 03, or if you're a single 04 or a married 04, this is when traditional really starts making a lot of sense. And again, you can have a traditional IRA or traditional TSP. And at the same time, you can have a Roth IRA and a Roth TSP. I think a lot of people get hung up on, ‘ which one should I contribute to?'. And again, do something, just do something. Contribute, just contribute. 

[00:15:50] Jamie: Pick one and then as you learn more, you can adjust fire. 

[00:15:52] Spencer: Exactly. Just as you figure out. If you do a whole year of traditional contributions while you're in a tax zone and you realize that was dumb, because you didn't pay any income tax that year and now that money is in a traditional account, while the money will come back out untaxed because it was a combat zone tax exclusion contribution. The growth is gonna be taxed. So, you're like, ‘man, that was really dumb, I should have done a Roth IRA and a Roth TSP that year.' Well, live and learn, you know? 

[00:16:19] Jamie: Like one year- it's not gonna be a big difference hopefully, if you set yourself up for success. 

[00:16:23] Spencer: So, the reason that, the government offers these tax breaks is because they want to encourage people to save for retirement and they want people to invest for the long term. So, it's really important that you maximize your tax advantage contributions every year because as soon as you move into the next year, you know, December 31st rolls around and it's January 1st, you've now lost the ability to contribute to your tax advantage account. So, for instance, a Roth IRA, in 2021 you get $6,000 a year of contributions you can make to that.

 If you wait and then it becomes 2022 and you were like, ‘man, I have $12,000 sitting around.' You can only put $6,000 in there. Now, if you're married to a spouse, even if they don't work, you can contribute to their Roth IRA, which is another thing that a lot of military service members miss, and it's not covered very well.

But if you have a spouse, you're married filing jointly, even if they don't work, even if they just work out of the home or whatever they do they don't make income on a W-2, you can still contribute to their Roth IRA. And that's a huge- I mean, you're basically doubling your retirement benefits at that stage.

[00:17:25] Jamie: It can be surprising how much $6,000 a year can add up. But also, it would expect that your Roth IRA or your traditional IRA is not the only investment avenue and retirement plan you have. If you do 6,000 into your IRA and you work towards maximizing your TSP, as you get in a couple more years and your income grows, you're gonna be well ahead of most Americans and in a very good spot if you keep up that progress. 

[00:17:53] Spencer: All right, I'm gonna play just a quick game since we're playing. We're talking about contributing to your retirement account. 

[00:17:57] Jamie: Oh, like a quiz?

[00:17:58] Spencer: Yeah! So here, it's a math question. All right?

[00:18:01] Jamie: I'm a history major though! 

[00:18:02] Spencer: I know, okay. So, let's say you're 20 years old. You have no money in your Roth IRA, and you contribute $6,000 to your Roth IRA for 40 years at a 7% return. So- 20, 40- now you're 60 years old. How much money do you think you'll have in your Roth IRA? 

[00:18:17] Jamie: Continuing 6,000 a year for 40 years? 1.2 million? 

[00:18:22] Spencer: It is 1.2 million! 

[00:18:23] Jamie: Is it really? I'm a genius! I promise to the listeners, I do not have that up on my screen anywhere. 

[00:18:29] Spencer: So, what's crazy about that, is you only contributed $240,000. This gets back to compounding interests. It is the most powerful thing in the world, but it takes a long time to kick in. So, you'll hear people talk about like the rule of 72 where basically you take whatever the rate of return is, you divide it by 72 and that's how often it'll double. So, if the stock market returns 7.2%, rule of 72, 7.2 divided by 72= 10. So, it takes 10 years to double.

The point here is small contributions. I mean that's $500 a month. But it's over a long time. And when you do that, you really just let compounding interest go do work for you. I mean, that's the whole point of financial independence and retiring early. That whole movement is putting this amazing wealth generating machine called the us stock market, or investment rental properties to work for you so that you don't have to. So, you can really deep dive into which tax advantage account is right for you. And I talk about that in the book, but for most people, most military service members, Roth is the right way to go. 

[00:19:41] Jamie: Especially starting out or if you're deployed. 

[00:19:44] Spencer: Yes. That's another one too. Here we are in 2021 and Afghanistan's winding down.

[00:19:50] Jamie: For the third time.

[00:19:51] Spencer: For the third time. Yeah. And Iraq is doing whatever it's doing, but there will always be deployments. There will always be- like the Adriatic Sea from Kosovo, it's still a designated combat, tax exclusion zone. So, if you happen to fly through there in a military mission, you just got that month tax free.

So, lots of opportunities. It happens in the Navy too; they sail through the Persian Gulf pretty often. And that'll probably be a designated tax-free zone for many years, but Roth is definitely- Roth TSP and Roth IRA are definitely where you want to start, but again, this is a great topic. Do your own research, but if you don't want to do your own research, just go Roth TSP, go Roth IRA, maximize your annual contributions to both of those. And I guarantee you'll be a millionaire within probably 20 or 30 years.

[00:20:35] Jamie: And not getting too much into investment advice, but if someone doesn't know what to do to start a Roth IRA, where should they go, if they want to do an IRA or something outside of the TSP?

[00:20:45] Spencer: So, I highly encourage people to start with the TSP. If you're not maxing your TSP yet, first of all, why not? Which it could be an income thing. A lot of the younger enlisted, lieutenants, or ensigns just don't make enough money. 

[00:20:58] Jamie: Or if they're paying off a lot of debt. Which we covered in our podcast from last week.

[00:21:02] Spencer: Yeah. Listen to the last episode, we talked all about paying off your debt. But the easy button for me is Vanguard for the IRA. That's where I hold my IRA. Both my traditional IRAs and my Roth IRAs. My wife’s are there as well. I have no problem recommending Vanguard to anyone, and really, Fidelity, Schwab, any of those guys you're not gonna have any problems with. They've been around for decades, they're very reputable organizations, they're all audited. 

[00:21:33] Jamie: And some of the funds may be more expensive than others though. 

[00:21:35] Spencer: That's true. So that is the tricky part with the individual retirement account, the Roth IRA is you have to choose the investments that are inside it. So, like my dad gets super fancy and he actually holds properties inside some of his individual retirement accounts. I think actually it's a SEP IRA, but that's a whole other topic. But if you mirror what's in your TSP, in your IRA, you'll probably do all right. Vanguard also offers a personal advisory service or PAS it's 0.30% a year or 30 basis points.

And that's a pretty good rate for if you look at Betterman I think is a quarter of a percentage point for their investment tailored portfolios. 

[00:22:17] Jamie: Yeah. If you go to a place in town, you pay 1.2%, 1.5%, 2.0% or more so, that really eats over the long run. Again, there's a lot of stuff with retirement accounts, IRAs, TSPs, Roth versus traditional. That's gonna be really deep dive in the military money manual book and on the previous episode. We already did a whole episode on the TSP, but the main thing for this point of the nine principles is to maximize your tax advantage accounts, which is a huge benefit for the military. We deployed, Roth the amount of money we get that's not taxed and just take advantage of those while you can. 

[00:22:52] Spencer: Yeah. I mean, it can't be mentioned enough. With the combat zone tax exclusion, you're getting tax free. You put it into your Roth, the government's like, ‘okay, that money was already taxed.' and now it's growing untaxed for 20, 30, 40 years. And then when you get to retirement, you get to pull that money back out untaxed. So, it's a triple tax benefit. I did a guest post on “madfientist.com”. If you just Google ‘mad fientist, military fire', it should pop up. But that is a benefit that not a lot of people talk about, and military service members can really maximize their tax advantages. And depending on your tax rate, whatever bracket you're in, that can be a 10, 15, 20% increase the value of the account because you never pay taxes on it.

[00:23:36] Jamie: And this doesn't depend on your rank or your income level. Everyone can take advantage of this benefit. Even if they're tax percentage just smaller than someone else's, it's not just something that like a Colonel or someone in for 30 years is gonna take advantage of. It's a benefit for everyone. All right, so the next one. Let's move on to savings rate beats rate of return. 

[00:23:55] Spencer: Yeah. So, the point I'm trying to get across here, is that if you're going for early financial independence, the amount of money that you can save every year as a percentage of your income, is way more important to achieving financial independence than the investment return that you get. That's just because compounding interest takes a long time to build up and start giving you those returns that are going to grow your accounts faster than you can save. 

[00:24:23] Jamie: Right. So, the savings rate, when you're talking about that, you mean “if I'm making $50,000 a year, what percentage of that money is going into savings?”

[00:24:32] Spencer: Exactly. 

[00:24:33] Jamie: And you would break that down into monthly and per paycheck if you wanted to go further, but what percentage of the money coming in is going into savings basically. 

[00:24:40] Spencer: Exactly. So, let's say you made $60,000 and you maxed out your Roth IRA at $6,000. I mean you can debate are we doing a pre-tax? Are we doing a post-tax? But again, the poor thing to focus on is do something and just say, look, I made $60,000 a year after taxes. I saved $6,000 and that's a 10%, savings. So, in the book I have this great graph, which basically breaks down the years to financial independence based on your savings rate.

So how many years do you have to work assuming a 7% or 8% return? I think the graph assumes a 7% return. And it's a pretty astounding graph because what it shows is if you follow the standard “cnnmoney.com” advice and save 10 or 15% of your paycheck, you're gonna be working for 40 or 35 years. I mean, it's just math. But if you can crank that savings rate up and start going way past what most people would consider reasonable, and start getting into the 20, 25, 30, 40, 50% savings rate range. All of a sudden, you're shaving decades off of your working life.

And I think this graph is one of those really powerful graphs that demonstrates you can make a choice. You can increase your income, keep your expenses the same and increase your income and save that additional income that you're making. Or you can trim your expenses, and again, keep your income the same, or you can do both at the same time. Increase your income, decrease your expenses, and save that gap. I think one thing about that is, whether you cut your expenses or increase your income, you can increase your income infinitely. There is no limit to how much money you make.

There is a limit to how much money you can cut. The quickest way, I think to financial independence is building multiple streams of income. You can't really budget your way; you can't really cut your expenses to rapidly achieve financial independence. It's two sides of this equation, it's have got to be a combination.

[00:26:46] Jamie: So, when you're looking at, if someone continues to have multiple streams of income, some really good side hustle, if they just keep making a lot of money, but they're spending a lot of money- like we talked about last episode with a professional athlete or something like that- there's definitely two sides to that coin, you have got to balance it for sure. But just an example, like you mentioned already on the working years or saving rate chart, that's in the book that's coming out soon. At 15%. It's about 43 or so working years. But if I bump up that savings rate to 50%, I'm at 18 years or so, depending on how fat my finger is on the chart of working. And so, when I first heard 50% or 40% savings rate- I guarantee you there's people listening that think that's crazy there's no way we could do that. But you can, we have, and we're not special. 

So, what's the most savings rate that you had in the year? 

[00:27:32] Spencer: Probably 50%, but here's the thing, that was just my paycheck. My wife worked as well, and we saved her entire paycheck. So really, it was probably a 60, 70% savings rate. And I think for a lot of people, if they are a couple and you're both working, just living off of one paycheck and saving the entire other paycheck, that's a 50% savings rate right there. We'll probably have to do an episode on that about how to combine finances when you're married, but you should be working towards the same goal anyways. And it can be various degrees of how much you're integrated, but a lot of people, when they hear 50% savings rate, they're like, that's insane I could never do that. But if you're married or you have a partner and both of you work, then just living off of one paycheck and you don't have to spend that entire paycheck. You could make sure that person is maximizing their tax advantage retirement accounts, saving their Roth IRA, their Roth TSP, and then you live on the rest and then the other person, you just save all that money.

 I know some of our dual military friends who live in Hawaii, they're clearing $250,000- $300,000 a year probably- and hopefully saving a lot of it. And that's huge. If they want, financial independence is within reach.

[00:28:39] Jamie: The best year we had was 47% with one income at the time, my wife was not working. It's possible, it doesn't have to be a dual military thing, it doesn't have to be both working and bringing in income.

[00:28:49] Spencer: A lot of people when I tell them my story, they ask “do you have kids?” And the answer is no. And they're like, then it's easy. Well, No. It's not, it might be easier because I don't have those additional expenses. But it's still possible.

[00:29:01] Jamie: But I also don't go out to a bar on Friday night and spend a hundred bucks on Mai Tais. I'm in bed because I'm tired. So, it's not just for officers, it's not just for military-to-military couples or dual working couples. An airman that lives in the dorms, their expenses are very low, and their savings rate, could be very high. Even though it's not a huge amount of money necessarily your savings rate, could be clutch. And then if you continue to keep that rate as you get more money and promote and get pay raises every two years or so, that's gonna be very huge in the long run. 

[00:29:32] Spencer: One of my favorite facts about the savings rate beats rate of return is that, if you have a 45% savings rate, you can achieve financial independence in less than 20 years, which is exactly when the military pension kicks in. So, I think for the above average military service member, who does stay in for 20 years, not only can you earn under the BRS, the 40% pension- under the legacy, the 50% pension- but you could be financially independent on top of that. So now not only do you have this inflation adjusted pension that is paid by the US government every year or every month for perpetuity, but you're financially independent in addition to that.

So, you can factor that in. So, if you are planning on going for 20 or you're getting close to 20 years and you're like, my pension's gonna be this, well then you can just subtract the amount that you need to save to be financially independent. And then when you're done with the military, you can be done working. And that's something that Doug Nordman, he lives here on Oahu, and he's got his website, the-military-guide.com. And he wrote a book, “The Military Guide of Financial Independence, and Early Retirement” and that was his big aha moment was when he retired from the military at 43.

 He'd been saving his whole life, made some investment mistakes, but still saved a lot, bought some real estate, and realized that between his pension and all his savings, he didn't have to go back to work. And he was even looking at that classic ‘Okay, have to go get a GS job- that's what you do when you retire from the military.' And he was like, or I could just surf.

[00:31:07] Jamie: And I think that's the huge benefit. When I first heard about a fire movement or financial independence, however many years ago, it sounded kind of like a scam or some kind marketing scheme, or some MLM or something. But in reality, it's just about you having the choice. If you want to work, then work, but if you don't, you don't have to. And that's powerful.

If I were to stay in the military for 20 years, I could retire from the military at age 41. Or I can start a side hustle and if it fails, so what, because I still have enough to live off of. Or, it is even better, then I can donate more aggressively and exactly be a philanthropist and whatever, take care of my kids and build generational wealth or die with zero, whichever way I want to go. It's all about choices. And I have the choice to control exactly what I do at that point.

[00:31:49] Spencer: I think letting people know, that you do have a choice, and it's completely independent of what the stock market does. And I think that's really empowering to people to realize that it's more about the things that you have control over so there's this concept in psychology, locus of control. Are you an externally focused person or an internally focused person? So, do things happen to you or do you make things happen? And when you internalize the principles of financial independence, and you recognize that your savings rate, which is something that you can control beats the rate of return. So, whenever the stock market returns- which is usually how I recommend most people invest who are going for financial independence- whatever it returns it's gonna return.

You have absolutely zero control over that. It's a random number generator. Like some years it's down 36%, some years COVID happens and it drops 30% in 30 days, and then it comes roaring back and what was our TSP up like 66% or something over crazy over the last four months. So, just recognizing that the market will return what the market returns and if you stay focused on the things that you can control, like your personal savings rate, and whether that's increasing your income, decreasing your expenses, or doing both at the same time, and rapidly achieving financial, independence. That's completely within your control. You have the power; you can do it. 

[00:33:14] Jamie: And we mentioned last time about taking on a side hustle, like Uber driving or something like that. One of the techniques you could employ is by doing something like Uber or delivering pizzas or whatever it is on the side. And then all of that paycheck that comes in goes straight to your investment and saving stuff. So, you never even view it as expense it just accelerates that. And it's just a gazelle intense focus on your goal. And if you really want it, you can find a way. Is there a magic number? Probably not. But would you recommend- where would you recommend they start on savings rate? If they feel like 50% is a little too much to think about right now?

[00:33:49] Spencer: Yeah. So, it's so difficult because it's one of those things where- if you look at the graph, it's like, how long do you want to work? Because that's what your savings rate is gonna determine. Now when you first find out about all the financial- the personal finance stuff that you weren't taught in high school, when you get in the military and you start making a paycheck and you're like, what am I supposed to do with this money? Or you accidentally or purposely rack up credit card debt. And you find yourself in this hole and you're like, shoot 50% savings rate. Like, man, I'm just trying to get to the next paycheck. It can be really hard to give someone every- any individual, a specific number.

 So, I think the first thing you have got to focus on, especially if you're in the BRS, the blended retirement system is you have got to do 5% of your TSP. You have got to get that full match because that's a hundred percent return right there. Then after that, take a look at the graph and say, okay, like this year I'm doing 5%, but you know what? Next year I'm gonna get a paid bump because I'm going to promote and I'm gonna make a 10% and look, how many years you just shaved off of your working life, right? Life's short- if you love what you're doing, good, choose to do that. But don't keep doing it because you don't have a choice.

So, create choices for yourself, create the freedom for yourself and every year or so, go back to that graph and say, all right, now I'm gonna bump it up to 20%. Or you get married, and you talk to your spouse and they're like, 50% savings we can never do that. Introduce him or her to the concept of, we could live off my paycheck and invest yours.’ Show him or her the graph and be like, neither of us would have to work after 17 years with a 50% savings rate. I think that it does sound hard, but a lot of good things are hard. 

[00:35:32] Jamie: And it's worth it because of the freedom to choose. You mentioned even going from 5% to 10%, just looking at the graph, that would take you from about, 66 years of work to 51. So about 15 years cut off just going from 5% to 10% rate. And that's probably the biggest jump.

[00:35:49] Spencer: It is the biggest in the chart.

[00:35:50] Jamie: But that is huge. And the similar concept we talked last time about debt, that's how we got out of debt so fast is that when my wife started getting a paycheck, we only had one kid at the time all of hers went to debt. We did retirement and all of our bills out of mine. And then our car payment at the time came out of mine and then all of hers just went to accelerating debt. So similar principle of if you have a second stream of income, from a spouse, then you take advantage of it, whether it's for debt, and then one day for independence numbers. So, it's a very powerful tool, the percentage of money that you put aside for savings. 

[00:36:23] Spencer: I think it's something that's not talked about a lot in personal finance, but it really is such a powerful tool. Again, it empowers you. It gives you the power to decide and you can dial it up and down. So, like I was saying, when we were younger, we were saving 50% of our paycheck. Well, we moved to Hawaii, and we looked around and we said, you know what? We want to live in a house with a pool and we're gonna have to cut our savings rate from 50% to 40% and that's okay.

[00:36:51] Jamie: Hashtag worth it. 

[00:36:52] Spencer: The pool is great. We love the house and besides the dogs, our neighbor's dogs. And if I look at the graph, I'm like, okay I might have to work two, three more years, but in actuality, like that expense, right? Like that drop-in savings rate from 50% to 40%. It's kind of temporary because we're only gonna live in Hawaii for three years. And when, whenever we go next for our next assignment or wherever we move to next, we could choose again. if we go to a low-cost living area, right? Like Alabama or somewhere else in the south, we can decide- we can make the choice again, and that's what it's all about, right? Freedom, choices. 

[00:37:27] Jamie: Probably one of the other misnomers about a high savings rate is that you can't have any fun, you're a cheap skate if you do that. I guarantee you, if you don't know Spencer or me, neither of us don't spend money. I would say I'm frugal in some parts. My dad beat that into us.

[00:37:45] Spencer: It comes out sometimes. You do order water a lot when we go out to restaurants. Or refillable sodas.

[00:37:50] Jamie: Yeah. I don't like paying for $14 drinks. But I have other ways when we splurge our great trip to Lanai. We talked about in the past.

[00:37:57] Spencer: In the first episode, I think we talked about the trip to Lanai and that was a thousand dollars night hotel. Which granted, we got it a lot cheaper because of travel, which we'll cover in another episode-

[00:38:06] Jamie: Which we learned and it's all on militarymoneymanual.com. 

[00:38:08] Spencer: Or check out the website. But I think the point is choosing what to splurge on. For instance, we have one car, it's a Mazda three. It cost I think it was $21,000 when we bought it seven years ago. And my wife, she has a little e-bike she has around town on, but we've been a one car family for the last seven years. I make it sound like it's a sacrifice, but it really wasn't. We designed our life so that we could only have one car. But that allowed us to have these much higher savings rates. 

So, I think for a lot of people, they spend money and they're not intentional on, what's making you happy, what's bringing you happiness and spending money on those things. And one thing that we looked at doing right before the pandemic in February 2020, is I went in test drove a Tesla. And I was like, man, this is a cool car. Like my next car will definitely be a Tesla, but then I got on my Mazda, which has 80,000 miles on it, and I thought the car's fine, it gets me from point A to point B, it plays music, the AC works, good gas mileage. So, I decided that the additional happiness the Tesla would bring me was not worth it. Maybe making that choice meant that my financial independence number was now three years closer and that was a choice. I got to make that choice. I could have made a different choice. I could have said, ‘Nope, I'm gonna buy the Tesla.' And I'm gonna accept the fact that I've just pushed my financial independence out three months or whatever it is. 

[00:39:26] Jamie: And it would not have made you a horrible person.

[00:39:28] Spencer: Exactly. It's okay. It's you get to choose. It's okay to spend money. 

[00:39:31] Jamie: I think maybe our parents' generation just assumed that we had to work forever, retire with the same company. I don't know, as my parents get older, I was like, I don't want to be working as long as they are. 

[00:39:42] Spencer: Yeah. Mom, Dad, I love you. I don't want to work to 70.

But let me rephrase that, I want to have the choice. If I'm doing something I love, maybe I'm still working on this website in 50 years. It's all virtual reality now or something. But what I want to be doing is helping people. And if that means I'm just helping my family and I'm not working, that's fine. But if it means that I can mentor people like through my website, I don't think I'll ever stop doing that.

[00:40:06] Jamie: But it's also your choice to continue to do that. Not because you literally won't be able to pay the rent for your power bill that month. And then I think that's a scary proposition that so many Americans feel trapped in that mindset of, if I don't continue to work, then I'm relying off of the government medical system in a senior assisted living home or something like that with no one to help. 

[00:40:27] Spencer: It's a very limiting and choiceless place to be. And financial independence really buys back the freedom, that as humans, not just Americans, but humans that we cherish. That's when we're happiest, is when we're free.

[00:40:40] Jamie: So again, 50% seems overwhelming, and 95% seems overwhelming. That overwhelms me a little bit, but there's some people who are gonna be able to do that. 

[00:40:49] Spencer: I know in Silicon Valley, there's guy's making 400 K a year. They live in a trailer in the parking lot of Google or Apple and their expenses are $10,000 a year. And their savings rate is 95%. And they'll do that for two years and then they'll quit if they want to. That's not a sacrifice I'm willing to make. I will never live in a trailer in my company parking lot. I just will not do that. I'm gonna live in a house. I'm gonna drive a car. But there's one guy, early retirement extreme. I don't know if you ever read any of that stuff ERE and I'm pretty sure he lived in the bay area on $4,000 a year maybe, it was $8,000 a year, but for a decade. And he would just free cycle things, he would repair things and he was an engineer making six figures a year. And he just didn't think it was efficient to spend money. And so, he just saved it and then ended up financially independent. 

[00:41:39] Jamie: The concept of having to do it, just because that's what everyone else is doing and the way that- TV or Hollywood, your family or whoever has portrayed to you that you have to work to your 70's- there's options. And that's really the heart of what we're talking about here. You controlling your saving savings rate gives you the option to choose when to stop working or when to switch to a job that maybe you're really passionate about, and they can't pay you anything or very, very low as an independent contractor or some consultant or something. But you just love the work so much that you want to do it. Lots of goodness there. 

[00:42:08] Spencer: This was a great conversation. I really enjoyed what we just talked about. So once again, we're running through- unless you got anything else to add for the end of the episode- going through nine money principles to live your life by, these are all from my new book, “The Military Money Manual” it's available at “militarymoneymanual.com”, Amazon. And the nine principles, again, are spend less than you earn, don't accumulate debt, and pay down your high interest rate debt ASAP. We covered those three topics in the last episode. In this episode, we talked about saving a three-month emergency fund- why that's so important, maximizing your tax advantage, retirement contributions, and we just wrapped up a lengthy discussion on remembering that your savings rate beats investment return when you're trying to achieve financial independence rapidly. 

[00:42:53] Jamie: Can we get a quick preview part three of the nine principles for the next time? Get a little cliff hanger there to keep everyone coming back for more.[00:43:00] Spencer: In the next episode, we're gonna be talking about what I like to call the “LADS” system of investing. So that's low cost, automatic, diversified, and simple, also known as “LADS”. So, we'll talk about, we'll talk about spending your money on what matters most to you, which we kind of touched on a little bit in this episode when we talked about freedom and choices, and then finally the last of the nine: buy income producing assets, don't buy liabilities. So that's what we're gonna talk about next time. Thanks everybody for tuning in. And remember, just do something.