I got a reader email that I had to share for two reasons. First, the question is about saving money and investing for retirement and it coincides very well with the Roth IRA Movement. Second, the reader is only 20 years old and is already looking at retirement savings!!!!!! This guy is a freaking BOSS!!!!!!
We’ll call him Military Mike, and here’s his email:
I was reading through your “Race to a million dollar net worth” blog. I really like it and it has shown me that I should start doing something.
Let me give you my background. I am 20 years old, active duty military. The only accounts I have are a checking, savings, and 2 credit cards (nearly paid off). I also have a TSP (Thrift savings plan) that is like a 401k/Roth IRA for military members. I only contribute 1% of my base pay to this.
Currently I only have around 2k in savings, my checking is almost zero (literally) and besides my fixed paycheck, I have no other means of income. I would like to start investing, however I really have no idea how to or what to use or if I can even do anything with 2k. Also since the 2k is all of my savings I don’t want to throw it all out there to potentially lose.
First of all, you are doing it right by getting started now. The earlier you start, the better off you’re going to be. Here’s how I would approach your situation:
Pat yourself on the back for not having any student loans
You’re way ahead of lots of young people who take out big loans to go to school. It took me years just to hit a net worth of $0 because of my student loans. On a related note, I want to personally thank you for serving our country.
Pay off any credit card debt you have that is accruing interest
Unless you are paying 0% interest, your best bet is to pay off the credit card first. If you are carrying a balance on a card with 15% interest, then paying that off essentially gives you a 15% return on your investment, which is higher than you should expect to get in the stock market.
You might want to add more to your savings account for emergencies
Considering you are active duty military, please correct me if I’m wrong but I understand you don’t have to pay for things like housing, meals, electronics or a car. There’s not much that could happen to you that would put you in a financial emergency. However, you might have someone at home who relies on your financial support (parents, siblings, a wife or kids). If there is anyone at home who might need money, it’s good to keep a few thousand in your savings account that you can access immediately if necessary. If that’s not an issue, then don’t worry about your “emergency fund”.
Unless your TSP matches your contributions, I would stop investing there and start investing in a Roth IRA
Roth IRAs are better than other retirement accounts for two reasons: you can remove your contributions at any time if you need them, and you can invest in anything you want. I would strive to invest the maximum of $5,000 a year. If you can do that, you’re in darn good shape at 20 years old.
Now for the big question: what do you invest in for your Roth IRA?
Investment Options for your Roth IRA
The nice thing about a Roth IRA is that you can invest in anything you want. Two options I like are the stock market and peer to peer lending such as Lending Club, where you basically act as a bank and fund loans for other people.
For the stock market, I helped my girlfriend invest in her Roth IRA. You can see what she invested in and why in my article How to Invest When You’re Clueless. As an FYI, I checked my girlfriend’s account today and she is up $300, or 6%, in just under a year. We both use Robinhood for our Roth IRAs because of the low cost of trades and zero maintenance fees. The trouble with the stock market is that there is a real chance you can lose money here.
On the other hand, Lending Club boasts the fact that people in their 800 note club have 100% positive returns. If you have the time and energy to find the right loans, then peer to peer lending has historically been a very safe place to invest money and get a good return with very little chance of losing money.
I recommend you do about $2,500 in the stock market and $2,500 in lending club, but you could do all $5,000 in one or the other. It just depends on what you are comfortable with. Remember, this is your money and these decisions are yours alone.
(note: you can have as many different Roth IRA accounts as you want, as long as you don’t contribute more than $5,000 a year to all of them combined)
Good Luck Military Mike!
Good luck with everything, and congratulations again on getting a head start on your retirement savings. I’m almost 27 years old and my net worth is only about $42,000 as of last month. With you starting right now, you can easily be worth over $42k by your 27th birthday as long as you start now and max out your Roth IRA every year.
Readers: Do you have any other tips for Military Mike?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
Great Job on getting the ball rolling on investing in your future! Personally I have no experience with lending club (and I live in a state where I can’t directly lend anyway). If you are not wanting to have to worry about selecting individual stocks (which does take time and research) there are many wonderful funds and ETFs to choose. I’m personally a big fan of the “lazy” portfolios (Google it). Another option besides Sharebuilder (which I use for my Roth) is Schwab. They only require $100 a month investment until you reach $1,000, then there are no fees. You also get access to free trades of their ETFs (I think fidelity has something similar, as does Vanguard, but I think they may have higher minimums).
Basically the only way you could lose in your situation is to NOT invest. Again, great job on getting started early you won’t regret it!
The Thrift Savings Plan is in the process of instituting a Roth option. Info is available on the TSP site at https://www.tsp.gov/whatsnew/roth/index.shtml.
Though military members are not offered a match, TSP is still a great investment option for them.
Wow, way to think ahead!
I would consider opening a Roth IRA at Vanguard and investing in the Vanguard Target Retirement 2055 Fund (VFFVX).
– The minimum amount to invest is $1,000
– Low expense ratio (0.19%)
– No maintenance fees if you sign up for their electronic delivery package
I have my Roth IRA and Rollover IRA at Vanguard and have been extremely happy since I opened my accounts 4 years ago.
Thank you for your service and keep on dominating your money!
One tip that I can give you is to keep your expenses the same. What I mean by this is when you get deployed (its going to happen) the money you earn when in a combat zone is all tax-free except for SS and FICA if I remember right. Take all the extra money from not paying taxes, and put it into your savings or Roth. This is something I totally regret not doing when I was deployed. You can spend a lot more money than you think over there. You’ll be able to come home with no debt and a healthy bank account. You are way ahead of the game though at 20 years old, not many people your age can say they are responsible and dedicated like you are. From a fellow ex-soldier, I wish you the best of luck and also thanks for the great service and sacrifices you are making for our country.
Great website and info… just to clarify on the military piece. I’m active duty military and unless you are a young enlisted troop, you will have to pay for housing and food. The reason they don’t pay is because they are living in the dorms/barracks and eat at the dining facility (cafeteria) on base. As far as everyone else, if you live off base you receive a housing allowance and subsistance allowance (food) that is not taxed, but it doesn’t pay for everything. Those are added into your base pay, which gives you a final salary amount. As far as the cars, there are “official” vehicles that can be used for “official” purposes, but that’s usually reserved for specific jobs and commanders. For a personal vehicle, you have to pay for your own car, and everything that goes along with that. A person can’t drive an “official” vehicle home or to run errands etc. It should only be used for a specific purpose to complete the job/mission. I enjoyed the Roth IRA info! Very easy to understand!
I think lending club is great and I’m their biggest fan, but…
If you’re investing a few thousand dollars in Lending Club, it means you’re going to be making money each month (score!). However, it also means that Lending Club is a more involved way of investing as opposed to putting your money in an index fund. So if you do go that route, you’ll probably need to go in and reinvest your earnings every few weeks, so make sure that’s something you have the time to do.
Lending Club is great, but I’m not sure it’s perfect for every situation. I imagine active duty military members have a little bit less time than the rest of us.
Quick background: I’ve been in the military for 15 years.
– I definitely agree with Kevin.. pay off your credit cards first. And then start building an emergency fund.
– I also have to agree with Daniel about lending club. Personally I have never used it but the fact of that matter is, we in the military, are not always available to manage our finances and investments so I recommend avoiding things that require a lot of maintenance.
– Don’t fret over the 1% in TSP and don’t stop contributing. My recommendation would be 1% of base pay and 50% of all other pays. Following that, as you reach your longevity milestones and annual pay raises for cost of living, increase your base pay contribution by 1%. This will effectively allow you to still receive part of that pay raise AND increase your contributions to your TSP. There are ways to leverage your investment in the TSP by borrowing against it (and paying yourself back interest) if the need arises. There are also circumstances where you are allowed to take your investment from the TSP without penalties. But don’t worry about that because you are still going to make an emergency fund. Right?
– Definitely open a Roth IRA and start up automatic investment when your financial situation allows for it!
– Lastly I’d like to point out that as a member of the military there are local resources available to you. In the Navy, each command has a Command Financial Specialist as well as a Fleet and Family Support Center with trained financial specialists to help you… all for free. Talk to your chain of command to get the information and failing that contact me and I will help you get in touch with the proper people at your station that can help you get where you want to be financially.
Quick background: I’ve been in the military for 15 years.
– I definitely agree with Kevin.. pay off your credit cards first. And then start building an emergency fund.
– I also have to agree with Daniel about lending club. Personally I have never used it but the fact of that matter is, we in the military, are not always available to manage our finances and investments so I recommend avoiding things that require a lot of maintenance.
– Don’t fret over the 1% in TSP and don’t stop contributing. My recommendation would be 1% of base pay and 50% of all other pays. Following that, as you reach your longevity milestones and annual pay raises for cost of living, increase your base pay contribution by 1%. This will effectively allow you to still receive part of that pay raise AND increase your contributions to your TSP. There are ways to leverage your investment in the TSP by borrowing against it (and paying yourself back interest) if the need arises. There are also circumstances where you are allowed to take your investment from the TSP without penalties. But don’t worry about that because you are still going to make an emergency fund. Right?
– Definitely open a Roth IRA and start up automatic investment when your financial situation allows for it!
– Lastly I’d like to point out that as a member of the military there are local resources available to you. In the Navy for instance, each command has a Command Financial Specialist as well as a Fleet and Family Support Center with trained financial specialists to help you… all for free. Talk to your chain of command to get the information to get in touch with the proper people at your station that can help you get where you want to be financially. This is not to say to stop reading and researching on your own. There are many good resources including this website to help you get information to make informed financial decisions.
Excellent job, Military Mike! And thank you, Thousandaire, for sharing his story! It is great to see such a young man already looking to secure his future and responsibly manage his finances. And Kevin gives great advice – follow his instructions and you should be in great shape! Thank you, to, for serving our country and protecting our freedom!
Great job even thinking about retirement Military Mike. Since you are only 20, I will assume you are enlisted… I was enlisted for nearly 10 years, but only began investing druing the last 3 of them.
USAA has great IRA options. I use them because they provide a self directed IRA, and all of the USAA mutual funds can be purchased with no commissions or fees ($8.95 for stock trades).
TSP is good too, low fees on those index funds. But you probably dont need the tax write off up front, so a Roth IRA might be your best bet because you get the money tax free in retirement.
Thanks so much for what you do. Good luck
I wouldn’t invest in Lending Club in my IRA. Stick to traditional index funds and watch your returns compound over time.
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