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By Barbara O’Neill, Ph.D., CFP®, AFC® 

Personal Financial Managers (PFMs) can change their clients’ lives dramatically by sharing information and tools to build wealth. One of their client’s most valuable financial resources is time for compound interest to work its magic on regular savings deposits such as Thrift Savings Plan (TSP) or Roth IRA contributions. Some young enlisted service members have almost 50 years before retirement age (e.g., age 18 to 67)!

Below are eight tips to share with military families to help them build wealth for financial security in later life:

  1. Develop Future-Mindedness. Studies have found positive associations between future-mindedness and a propensity to make plans and positive financial (and health) practices. When people focus on their future and set goals with a dollar amount and time deadline, they tend to be less impulsive spenders and more likely than non-planners to make savings progress and to have savings set aside for emergencies and retirement.
  2. Practice Frugality. Frugal people prioritize spending on items they value and reduce or eliminate other spending. One way to foster a frugal mindset is to “convert consumption into labor” and calculate how long it takes to earn money to buy different things. Three ways to reduce spending include shopping at thrift shops, consignment stores, and online resale websites, buying store-brand foods, and ordering water when eating out.
  3. Build Assets– Time-tested strategies to increase investment balances include increasing household income, spending less than you earn (i.e., living “below your means”), saving all or part of positive cash flow, investing early and regularly, automating regularly scheduled investments, paying off debt, and using credit sparingly for “good debts” with the potential for higher income (e.g., certification course) or appreciation (e.g., a house).
  4. Respect Compound Interest. Compound interest is like Jekyll and Hyde. It has a “split personality” depending on how it is used. Compounding can be a financial BFF when people earn interest (and, later, dividends and capital gains) on money that they set aside. It can also be someone’s worst enemy when interest is paid on borrowed money. TSP calculators can be used to show service members both aspects of compound interest.
  5. Separate Good and Bad. Good (growth) assets have the potential to increase in value. Examples include a house, stocks, and index mutual funds. Bad (depreciating) assets lose value and include cars, computers, big-screen televisions, and clothing. Good debt is borrowed money used to acquire a good asset (e.g., a home mortgage) and bad debt is borrowing for a depreciating asset (e.g., a revolving credit card balance for clothes).
  6. Maintain a High Credit Score. Two key strategies required to maintain an excellent FICO credit score of 720 or above (on a scale of 300 to 850) will also prevent a military family’s debt from getting out of hand and make it easier to get car insurance or to rent an apartment and set up new utility services during a PCS-related move. The two best ways to raise a credit score are to pay bills on time and keep the amount of money borrowed low.
  7. Regularly Track Net Worth. The best measure of financial success isn’t what people earn but how much they earn and keep. Net worth (assets minus debts) starts out low (even negative) for most people but can build to 4-, 5-, 6-, and even 7-figure sums with regular savings and debt repayment. Expect to see some declines resulting from market downturns but a growing net worth, compared to prior calculations, can be extremely motivational.
  8. Produce Passive Income. Passive income is money earned when someone is not working and it is a great complement to active income such as military pay. Passive income may require some work to establish but does not require a full-time, five-day, 9 to 5 job. Examples of passive income include interest from a high-yield online bank account, dividend-paying stocks or REITS, a rental property, and renting a room or storage space.

For additional information about building wealth strategies for service members, review this list of PFM Tools.

Photo by Sharefaith from Pexels.