WHAT TO SAVE FOR

Nearly a quarter of savers who take the Military Saves pledge chose “emergency savings” as their first wealth-building goal. And they have the right idea. Research shows that low-income families with at least $500 in an emergency fund were better off financially than moderate-income families with less than this amount. Yet most Americans don’t have enough savings to cover an unexpected emergency.

What is an emergency savings fund?

An emergency savings fund consists of at least $500, usually in a savings account that you do not have easy access to. Saving for this fund starts with small, regularly scheduled automatic contributions that build up over time.

Why should you start saving for emergencies?

Maintaining an emergency savings account may be the most important difference between those who manage to stay afloat and those who sink in debt. It also gives you peace of mind knowing that you can afford to pay unexpected expenses. That’s because keeping $500 to $1,000 of savings for emergencies can allow you to easily meet unexpected financial challenges such as repairing the brakes on your car or replacing a broken window in your house.

Not having emergency savings is one of the reasons many individuals borrow too much money, resort to high-cost loans, or increase their credit card balances to high levels.

How should you build your emergency savings?

The easiest and most effective way to save is automatically. This is how millions of Americans save. Your bank or credit union can help you set up automatic savings by transferring a fixed amount from your checking account to a savings account. Learn more about saving automatically. 

Where should you keep your emergency savings?

It’s usually best to keep emergency savings in a bank or credit union savings account. These types of accounts offer easier access to your money than certificates of deposit, U.S. Savings Bonds, or mutual funds. Though these are useful tools for long-term saving, they are not ideal for an emergency fund that you may need access to more quickly. But not too quickly! Keeping your money in a savings account makes it much less likely that you will use these savings to pay for everyday, non-emergency expenses. Out of sight, out of mind. That’s why it is usually a mistake to keep your emergency fund in a checking account.

How can you get started?

Those with a savings plan are twice as likely to save successfully. This includes setting a goal to build an emergency fund and deciding how much you want to save each month. This is where we come in. If you’re ready to make a commitment to yourself to save, take the Military Saves pledge to save money, build wealth, and reduce debt. We’ll keep you motivated with information, advice, tips, and reminders to help you reach your goal to build an emergency fund.

Retirement savings is a top priority for many Savers. If you are Active-Duty Military or a DoD civilian employee you have access to the Thrift Savings Plan (TSP). Eligible service members now have access to the new Blended Retirement System.  

Unfortunately, many veterans, spouses and family members do not have access to an employer-sponsored retirement plan, such as a 401(k) plan.  Even if a spouse or family member's employer doesn’t offer a retirement plan, you can still save for their retirement, and get some tax benefits in the process, by putting money in an Individual Retirement Account (IRA).

Saving at Work

Who qualifies to make IRA contributions?

Anyone who earns income (or receives alimony) can put money in an IRA. Couples can also put money in an IRA for a non-working spouse.

For 2020 and 2021, each person can contribute up to $6000 total to an IRA if they are age 49 or below and up to $7000 if they are age 50 and above, so long as contributions do not exceed earned income. Each year you have until the April 15 tax filing deadline to make your IRA payment for the previous tax year.

There are two main types of IRA – traditional IRAs and Roth IRAs. In addition, those who are self-employed can put money in a SEP-IRA. Each has its own set of rules and offers different tax benefits. This article will deal with traditional and Roth IRAs.

Traditional IRAs are open to anyone up to the age of 70 1/2. Money in a traditional IRA grows tax-deferred. In other words, you won’t have to pay taxes on any earnings until you take the money out. That allows your money to grow faster than it would if you had to pay income tax each year on those earnings.

Traditional IRAs Offer Tax-Deductible Contributions

Your contributions to a traditional IRA may also be tax-deductible, which is an attractive feature for many people. That’s because you get a portion of your IRA payment “back” immediately in the form of a lower tax bill.

If you are not eligible for an employer-sponsored retirement plan, you can make tax-deductible contributions to a traditional IRA. You can also do so if your income falls below certain levels, regardless of your retirement plan status.

For tax year 2020, couples filing a joint tax return who report modified adjusted gross income up to $104,000, and single filers with income up to $65,000, are eligible to make fully deductible contributions to a traditional IRA. In addition, taxpayers with incomes slightly above these limits - $104,000 to $124,000 for couples and $65,000 - $75,000 for singles - can make partially deductible contributions. Find out more information at irs.gov.

When you put money in a traditional IRA, you can’t get it out before you reach age 59 1/2 without paying a penalty, although there are exceptions. Some people consider this a disadvantage of traditional IRAs, but it can help keep your retirement savings on track. You also cannot contribute to a traditional IRA after you reach the year in which you turn age 70 ½.

Once you start taking money out of a traditional IRA in retirement, you will have to pay ordinary income tax on any earnings and on your tax-deductible contributions, but no federal taxes on withdrawals of non-deductible contributions. Depending on where you live, you may have to pay state taxes on those withdrawals.

ROTH IRAs Offer Tax-Free Withdrawals

The benefits of Roth IRAs are almost exactly opposite those of traditional IRAs.  Spousal Roth IRAs are the same.

You can’t make tax-deductible contributions to a Roth IRA. On the other hand, the money you put in a Roth IRA grows not just tax-deferred, but tax-free. In other words, you won’t have to pay any federal taxes, or state taxes in most states, on your earnings when you take money out, provided you meet certain requirements. You are also less likely to have to pay a tax penalty if you withdraw money early from a Roth IRA.

There are no age limits for contributions to a Roth IRA, so long as you have earned income. On the other hand, there are income limits. However, those limits are quite high.  Singles who report modified adjusted gross incomes of up to $124,000 in 2020 and couples with incomes up to $196,000 qualify for a full contribution. Taxpayers with slightly higher incomes – $124,000 - $139,000 for singles and $196,000 - $2036,000 for couples filing jointly – can make partial contributions. Find out more information at irs.gov.

Where Can You Open an IRA?

Virtually all major financial services companies – such as banks, brokers, insurance, and mutual fund companies – offer IRAs and make it easy to open an account.

A reputable mutual fund company that offers a wide selection of funds, low costs, and reasonable minimum investment requirements, is a particularly good option for many. Many of the top companies also offer excellent educational materials to help you pick the best funds for you.

Regardless of where you decide to open an account, your retirement savings will get a real boost if you commit yourself to make annual contributions to an IRA.

More and more people who take the Military Saves pledge are choosing investment savings as their goal. Making investments can build wealth over time more reliably than using a savings account, but it also involves risk. So, it’s important to educate yourself. Here are some resources to help.

Before you start comparing investment options, learning about some basics like asset allocation, diversification, and risk tolerance will help you decide which to choose.

Investment Options

According to the SEC, stocks, bonds, and mutual funds are the most common types of investments. Other options include annuities, exchange-traded funds, money market funds, and U.S. Treasury securities. The SEC provides details about various investments. FINRA, an independent organization that also regulates the securities industry, provides a helpful overview of different types of investments. 

Making Your Investment

After learning some basics, it’s time to decide how you want to invest your money. The SEC can help you decide whether to invest on your own, or hire a broker or adviser. If you decide to use a professional, you should make sure that your broker or adviser is a fiduciary, which means they owe you legal duties to serve your best interest. Not all financial professionals are legally required to be a fiduciary. If the financial professional you work with is not already legally required to be a fiduciary, make sure they sign this fiduciary oath, agreeing to act as a fiduciary under the law. You can find fiduciary financial professionals at CFP Board, Financial Planning Association, and National Association of Personal Financial Advisors (NAPFA). FINRA and NAPFA offer step-by-step guides for evaluating financial professionals.

Protecting Yourself from Investment Pitfalls

Fees

To get the most out of the money you invest, it’s important to understand the fees. The more you pay in fees, the lower the return on your investment.

Fraud

Unfortunately, investment fraud like Ponzi schemes and advance fee scams are a fact of life. You may stumble across some fraudulent investment offers as you research your options. Make sure you know how to avoid losing your hard-earned money to fraud by following the advice of the BBB, FINRA, and the SEC.

Saving for education is the second most popular goal (after saving for emergencies) savers select when they pledge to save with Military Saves. There are many different things to factor in when saving and paying for college.

According to the College Board, the average cost of tuition and fees for the 2015–2016 school year was $32,405 at private colleges, $23,893 for out-of-state residents attending public universities, and $9,410 for state residents at public colleges. The average cost of room and board in 2015–2016 ranged from $10,138 at four-year public schools to $11,516 at private schools.

Here are some ways you can minimize the cost of college:

• Grants and scholarships are often called “gift aid” because they are free money – financial aid that doesn't have to be repaid. Grants are often need-based, while scholarships are usually merit-based.
• According to the College Board, the average community college costs $3,435 and the average student received enough grants and tax breaks to cover the typical tuition and all but $10 of the average $1,230 bill for textbooks and school supplies. Attending this type of college for your first two years can save you thousands of dollars.
• Earning money while you attend school is one way to help keep costs down – especially if you don’t have enough saved to pay for college in full. Any money you earn is money you don’t need to borrow.
• Provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the student’s course of study.

Here are some ways to save for college:

• A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
• The Education Savings Bond Program permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and Series I bonds issued after 1989.
• If you need to borrow money to pay for college or career school, start with federal student loans.

Think and acting like a saver not only means knowing what you’re saving for and how much it costs, but having a plan for building that savings. Whether you’re saving for a phone, a computer, a car, or college, Military Saves can help you get good savings habits started.

Getting out of debt is the #3 goal Savers select when they pledge to save. That does not come as a surprise since a 2012 survey showed that 45% of families with annual incomes under $50,000 rely on credit cards to pay for basic needs such as rent, utilities, insurance and food. Large consumer debts can also keep you from saving and building wealth.

The good news is that there is hope. With planning, discipline, patience, and maybe some outside help, almost anyone can reduce their debts and start to accumulate wealth.

Are you in Trouble?

If you answer “yes” to any of the following questions, then you probably need to get your debts under better control:

1. Can you only afford to make minimum payments on your credit cards?
2. Do you worry about finding the money to make monthly car payments?
3. Do you borrow money to pay off old debts?
4. Have you used a home equity loan to refinance credit card debts, then run up new revolving balances on your cards?

Almost anyone can afford to own a home with proper preparation. Develop a savings plan to build up money for a down payment at purchase, for moving expenses, and for post-purchase emergency expenditures such as needed home repairs. Remember, the larger your down payment, the lower your home loan payment. Military Saves can help you develop a plan with regular monthly deposits in a bank or credit union account. At the same time, reduce your credit card and other debts in order to increase your ability to afford a house. Lowering these debts will increase your credit score and your chances of getting a lower-interest loan. For information about credit and help with debt repayments, contact your local, nonprofit consumer credit counseling service or housing counseling agency.

Get qualified for a home loan before you look for a house, condo, or co-op. That will give you some idea of whether you can afford to purchase a home and, if you can, at what price. Make certain you contact at least three lenders, including your primary financial institution. This will help ensure that you get the least expensive loan for which you can qualify. Be especially skeptical of uninvited loan offers you receive through the mail, by telephone, or online. In looking for a home, most home buyers find it helpful to work with a real estate agent. Consider using an agent that will work solely for you as a buyer representative. 

The larger your down payment, the lower your home loan payment. The most effective way to save a larger down payment is to set aside a portion of each paycheck. With direct deposit, your employer can split your paycheck between checking and savings accounts.  Or, ask your bank or credit union to regularly transfer a certain amount from your checking account to your savings account. Also, ask your financial institution about other savings products that can help you save more. If you need assistance finding money to save, check out our savings tips and strategies!

Military families move all the time, but to prepare for a life of moves, you need to know what to expect both before and after a move. That means asking a lot of questions and doing some research. Know the costs involved, make a PCS (Permanent Change of Station) plan, and set aside funds specifically ear-marked as a PCS fund.

The following tips can help you plan financially for your next move.

• Get on the same page. Start by talking with your spouse about your family's finances. The FINRA Foundation offers eight steps to help you initiate a discussion that is productive and may prevent potential financial difficulties.
• Close out and transfer accounts. Make a list of all your financial accounts. Note which accounts may be transferred to your new location and which ones need to be closed and reopened. Moving to a new location may provide an opportunity for lower rates on some financial products such as auto insurance, homeowners, or renters insurance. 
• Pay all your current bills. To avoid negative impact on your credit, be sure to pay all close-out bills promptly, such as electricity, water, or other utility bills. Provide all organizations with a forwarding address for any unpaid bills that post after the move.
• Compare the value of your housing allowance. As you create a budget detailing expected income and expenses at your new duty station, be sure to compare current and future Basic Allowance for Housing (BAH) to determine how much house you can afford. Make sure you keep utility costs in mind, too. Use the BAH Calculator from the Defense Travel Management Office to find out your specific allowance.
• Save those receipts! Be sure to keep all your receipts—including expenses that don't qualify for reimbursement because they may qualify as tax deductions.

It can be hard to put aside money for savings. But there is an easy way to save money without ever missing it. Make your savings automatic. You can start small and save $20 a week or month or you can try and save more.

How to save automatically

• Many employers allow you to divide your paycheck into different accounts. Take advantage by putting part of your pay into a savings account.
• If you get paid in cash, take a small amount to the bank to deposit into a savings account. Many banks make this easy by allowing you to deposit cash directly at an ATM. Tip: do this the day you get paid. That way you will be less tempted to spend the money.

Why automatic savings works

• Saving automatically makes it easier to save because your money is saved with each paycheck – you don’t have to think about how much to save or take any additional steps.
• It’s tempting to spend money when it’s readily available. If you don’t see the money, you are less likely to miss it.

I don’t have enough money to save

Everyone has the ability to save. At Military Saves, we say “Start Small, Think Big.” You can start with only $10 a week or month. You have to start somewhere. When you get extra income, you can add that money to your account as well:

• Put a portion of your tax return money into savings.
• Put birthday or holiday money into savings.
• Hold a garage sale and put that money into savings

Over time, your deposits will add up. Even small amounts of savings can help you in the future.

Do you save automatically? Let us know on our Facebook page.