Contributions by Molly Herndon and Carolyn Bird
In this third installment in this series, we’ll tackle the steps of saving and investing. By now, we’ve covered budget tracking, credit scores, and now we’re on to an important cornerstone of a sound financial wellness plan.
Step 5: Saving
Savings are a key component of a successful financial wellness plan. An “emergency” savings fund acts like an insurance policy to meet unplanned expenses. We know that things are bound to break, we just don’t always know when. An emergency savings account can help keep credit card debt under control by providing the means to, for example, replace a flat tire, buy a new washing machine, or to repair the furnace. An emergency savings fund should be quickly and easily accessible, without fee or early withdrawal penalty and is a vital component to a smarts savings strategy. Without an emergency fund unexpected expenses can wreak havoc on a budget. Taking money from retirement account is typically not best approach since that jeopardizes your future financial security and costs you money in penalty charges. Encourage your client to research high-yield savings options with your client to assure their money is earning the most interest, and garnering the fewest fees, possible. You may also want to discuss the importance of being adequately insured and other measures that can reduce economic hardship during disasters. An amount for saving should have been determined when your client was creating his or her monthly budget tracker. Now, work with your client to evaluate progress toward savings goals. Discuss any savings plans the client may already have through the military. Service members may already be contributing to the Thrift Savings Plan (TSP), and if not, walk though the benefits of these defined contribution plans. You may also want to review monthly expenses to determine if they could increase the monthly amount going into the TSP account. Here are some simple ways to decrease monthly expenses and increase savings.Participation in the TSP is a great way to start or to supplement a retirement savings fund. Early contributions toward retirement are an important practice for service members who are establishing sound financial management strategies. The amount of money needed at retirement is shaped by the sort of retirement a person envisions. For many of our service members, retirement is decades away. So, for now, the best plan is to put the power of time and compound interest to work. In the future, the service members will a great resource available as they begin to seek guidance to tailor their retirement savings and investment plan. Service members with children may be interested in starting a college savings accounts for their children.
Step 6: Investing
Service members who are meeting their monthly financial obligations may be interested in earning more from their savings. Start by determining your client’s level of risk tolerance. Young and financially secure clients may be willing to tolerate larger losses for the opportunity to gain higher returns, but this is not always the case.
The Thrift Savings Plan is an excellent way for service members to invest and save up to $16,500 pre-tax dollars a year, but some service members may also be interested in the benefit of opening an IRA to enrich their savings plan. In addition, active duty service members may be interested in the Department of Defense Savings Deposit Program (SDP), which was established to provide members of the uniformed services serving in designated combat zones the opportunity to build their financial savings. The SDP offers a guaranteed interest rate, currently at 10 percent annual interest, while the service member is in a combat zone and for up to 90 days after departing the combat zone.
To be eligible for the DSP, the service member must be receiving Hostile Fire Pay and be deployed for at least 30 consecutive days or at least 1 day in each of 3 consecutive months. Your client may want to consider timing the receipt of a re-enlistment bonus to meet the DSP guidelines. Amounts up to $10,000 may be deposited and will earn the 10 percent annual interest (compounded quarterly). Wouldn’t this be a great way to maximize that bonus? You will wan to be sure your client understands that interest does not accrue on amounts over $10,000 and that interest on balances up to $10,000 will cease on the 91st day after leaving a declared combat zone. Service members will want to have a plan for those funds after this period to keep their money working for them. Withdrawals can be made through a service member’s myPay system.
Working with service members to evaluate their savings and investment goals and expectations is a crucial step in developing a sound financial management plan. Next week we will discuss raising financially fit children, and the importance of modeling responsible financial behavior for the next generation.
What savings strategies do you suggest to clients? What hinders a successful savings plan?