Soldier of Finance (13 page)

“Budgeting is one of the cornerstones of any stable financial life, whether you're a rock star earning six and seven figures or a regular Joe pulling in five. Everyone has a good handle on how much they earn each month, but without a budget, it's difficult to know how much you are spending each month. If you don't know how much you are spending, you won't know how much you're saving and that makes it difficult to plan for the future.

The first step is tracking and recording your spending. I'm a numbers junkie and I started my budget by tracking every penny I spent on anything. Excel was my ‘personal finance' software and I tracked everything in it. If you're like me, then open up Excel and start tracking everything. The moment you start doing that, you'll begin playing with the numbers and trying to figure out how to save more and devote more of your hard-earned money to the goals that matter to you!

If you aren't a fan of budgeting or you've failed at it in the past, start with something easier. Start by tracking how much you spend by the dollar, rounding up each time. If you spent $1.50 on a cup of coffee, write down $2. If that is too much for you, consider signing up for a service from a site like Mint that will look through your credit card transactions, categorize them, and produce lovely reports that explain where you are spending your salary.

The next step is to improve your budget by finding areas of your spending you can trim. If you find yourself spending too much in one area, make a concerted effort to pare back those expenses. When I first started budgeting, I noticed I was spending too much money eating at ‘restaurants,' which included the cafeteria at work. Every day I'd spend at least $7 or $8 on lunch, which was a $40 weekly drain on my budget. In the span of 52 weeks, that's a solid $2,080 each year on lunch alone. I really enjoyed eating lunch with my friends in the cafeteria, but I could eat better food by bringing in leftovers or preparing my own lunch.

Eventually, you'll get into a monthly rhythm where your expenses won't change too much because you've fallen into a pattern. Remember to occasionally revisit your budget to see if you are still on track, spending about the same in each category, and whether your priorities have changed.

If you've never budgeted before, I highly recommend giving it a try. Stick with it for at least two months. If you still hate doing it and can't stand to do it, then at least you now understand where you've been spending your money the last two months. You'll find that budgeting is one of the easiest, cheapest, and more valuable ways to get a better sense of your current financial situation and the direction you're going.”

 

My memory of the early days in training can be summed up in one word: chaos. We completed drills over and over again to teach us how to deal with a variety of situations that could occur on the battlefield. Our primary mode of transportation was typically a convoy of three Humvees. If the lead truck went down, the response would be different from what it would be if the middle or rear vehicle was hit.

Driving through the woods one day, simulating a standard patrol, one of the instructors suddenly jumped out from cover, popped smoke to simulate an explosion, and barked out the scenario: “This Humvee's hit, gunner's down, driver's down. Go!”

The first time, no one was sure who should grab the radio, so everyone talked into their radios and communication got lost in the chatter of voices. The instructor then further complicated the drill; he told us we were taking sniper fire, and didn't know where it was coming from. We weren't sure who was supposed to secure the injured or who should call for a medivac. Two trucks were called when only one was needed, adding to the general confusion.

Then came the task of attempting to carry a 200-pound wounded soldier—with his heavy gear—from one truck to another. Just getting him out of the tight fit inside the Humvee was a comical and pathetic sight.

Had we really been in combat, we all would have died. We had no idea what we were doing and had never worked together as a team. Nor had we learned our assignments properly…yet.

Two months later, after practicing that drill over and over and over and over, it was a different story. Battle drills taught us how to work with each other, what to expect, how to depend on our Battle Buddies, and how to get the job done without panic or confusion. The first time we came under fire in Iraq, I was glad we had practiced those drills. Reacting with cool confidence was far less a matter of courage than it was training and practice.

Budgeting is a family project. Everyone needs to be on the same page. If you cut expenses but your spouse does not, you'll be fighting each other and not gaining much ground. As every frontline soldier knows, you're only as strong as the support team behind you.

You must sit down with your entire family and together devise a plan of action that you can all stick to. Honest communication is essential for this mission. There may be things that you will have to give up in order to get your debt under control: hobbies, shopping sprees, golf outings, pedicures, gadgets, etc.

I want to inject a comment here about separate checking accounts, where the husband has
his
money and the wife has
her
money. I have come across this arrangement quite a few times, and it not only puzzles me, it concerns me, especially when a family is struggling to overcome debt. When you agreed to join together in marriage, “Till death do us part,” you agreed to be together. Keeping your money separate implies that you have separate goals and different directions that are important to you.

Lack of unity in planning often creates difficulties in gaining control of finances. Separate accounts may seem trivial, but they usually accompany a limited amount of communication or agreement about financial goals. Both are necessary in order to achieve success.

Working together to defeat your financial enemies involves preparation for every possibility. Once you get your budget in order and you see your situation clearly, it is beneficial to walk through different scenarios to see what would happen if there were extreme changes to your expenses or your income. Run your own Battle Drills and visualize what would happen if suddenly you were laid off from your job. What would happen if you needed to replace your furnace? Could you make it if the price of gasoline doubled? Battle Drills help you prepare for these situations and point out any areas you haven't thought about.

To get the most out of your Battle Drills, use the following Battle Drill Checklist as a basis for your family meeting. Discuss these questions and any others that arise in relation to your financial future. The key to successful Battle Drills is communication. This doesn't need to take a long time, but everyone in the family needs to be familiar with the financial situation and with your plans and goals. You need to function as a team to make this work.

Go / No Go

• Tactical Budgeting allows you the freedom to not be tied to a budget when you don't need to be. This method helps you to make use of budgets for limited periods of time to accomplish specific goals, such as buying a house or planning a vacation.
  
• A budget is used to determine exactly where your money goes and identify things that you don't need to spend money on. By keeping track of spending for a period of time, you will see how much you spend unnecessarily.
  
• Setting up a Basic Training Budget begins with analyzing your records, receipts, bank statements, and credit reports. Take note of where your money goes.
  
• Use this information to create a budget by categorizing expenses—rent/mortgage, phone, utilities, car payment, and other expenses. Fill in the expenses for each category so that you can set limits on your spending and keep track of it.
  
• Online resources are available to assist with budgeting. Find one that works best for you.
  
• Train yourself and your family to follow budget guidelines by having Family Battle Drills. Involve the entire family in discussions of how you will plan your spending.
  

As long as we were in a combat area, we were always ready. One thing we rarely did was take off our boots. In case of an emergency, it took too long to lace them back up. Many times I ran down the hallway, pulling on my vest, balancing my helmet on my head while hoping I didn't drop my M-16. All those things can be done while running, but you have to have your boots on.

Emergencies don't wait until you're ready. If you aren't prepared and ready to take them in stride, they will cause you problems. You can't anticipate everything, but you can prepare for the unexpected. Once you have your budget laid out, you know which things are expected. Now it's time to think about setting aside funds for events you can't predict.

Most Americans do not have any contingency plan set up if the unexpected occurs. They assume that as long as they are working, everything's fine. If an emergency comes up, they pull out their credit cards, which adds to their debt and further undermines their financial future.

The economic collapse of 2008 took many by surprise. People who thought they could coast to retirement were suddenly looking for work, and jobs were hard to find. They quickly discovered that unemployment benefits were not nearly as much as their income had been, and they last for only a certain amount of time.

Job loss is not the only emergency you may face. You also never know when your family will be hit with unplanned medical bills. Insurance helps, and we'll talk about that in
Chapter 16
. Even with insurance, however, there is likely to be a lapse between the moment you need the help and the moment it arrives. While you're waiting, you don't want to spend time worrying about basic things, such as how to put food on the table.

“No plan ever survives contact with the enemy.”
This is a paraphrase of a statement by Prussian Field Marshal Helmuth von Moltke. If you want to be completely accurate, the original quote was:
“No plan of operations extends with any certainty beyond the first contact with the main hostile force.”
I find the shorter version easier to remember.

What von Moltke meant was very simple; there are always things you cannot predict. You must have the means of adjusting your plans on the basis of new contingencies. The Army has a name for these midcourse corrections; they call it FRAGO, which stands for “Fragmentary Order.” A FRAGO provides changes to an existing order.

As a Soldier of Finance, you will occasionally make adjustments based on emergencies or unexpected events. Your FRAGO will have a different meaning; I call it a Financial Reserve and Goal Fund (FRAGO Fund). Essentially, this is an emergency fund, but it's a little more than that. You now have specific objectives in your life that you are working to complete and you're no longer living your life aimlessly from paycheck to paycheck. You're moving forward and want to minimize interruptions in pursuing your goals. By developing an emergency reserve, you avoid taking too long of a hiatus in your cash flow. You have enough cash on hand to keep you going for a period of time. This allows you to deal with any minor emergencies, like a car breakdown or repairs on your house.

The goal for an emergency fund is to put aside enough money to keep your bills paid and enable you to live for a period of time if your income were to suddenly stop. Ideally, you should have enough money to live for three months. That gives you time to make whatever adjustments are necessary. If you were laid off, it allows time to look for other work or to set up unemployment benefits. If you face a medical crisis, this gives you time for insurance to kick in.

While three months is ideal, you need at least one month of living expenses on hand. How much money should you have in your FRAGO Fund? Many financial advisors recommend a simple amount like $1,000. That's not a bad place to start, but you need to consider your geographic location. If you live in the Midwest, $1,000 is a workable reserve. If you live in Los Angeles, $1,000 won't last much more than a week. A simple formula can be used to determine how much should be in your emergency fund:

 

BAH (Basic Allowance for Housing)
+
ME (Monthly Expenses)
=
FRAGO Fund minimum

BAH
is a military term for Basic Allowance for Housing. This represents your mortgage payment or your rent.

ME
represents your monthly expenses. This includes utilities, food, and the minimum payment on your loans and credit cards. These numbers should be easily accessed from your current budget.

FRAGO Fund
calculation is the minimum required amount. Of course, if you can build up the fund, do so. But don't lose sight of your primary missions, which is wiping out your debt.

1.
Using your basic budget from
Chapter 10
, determine how much money you need for one month.

2.
Open a savings account, if you don't already have one.

3.
Decide on an amount that you will deposit into your savings account from each paycheck until you have a minimum amount accumulated.

 

In combat, we always wore camouflage. Our uniforms were designed to match the terrain. Vehicles were painted in colors that would blend in with the ground. Netting was pulled over gun emplacements and bunkers to make them as difficult to see as possible. The object is to deceive the enemy regarding your location, strength, and abilities.

Of course, the enemy is always doing the same thing; they don't want you to know their weaknesses. Unfortunately, when it comes to dealing with emergencies, many people think they have cash because they have credit. They are not the same thing. Don't be fooled by imposters that try to make you think you have cash on hand. Here are the major imposters to watch out for:

Imposter #1: Credit Cards.
Having access to a cash advance on your credit card does not mean you have cash. Stop fooling yourself. When you have to pay 20% interest for any cash you borrow, you're just digging yourself deeper into a financial hole.

Imposter #2: HELOCs (Home Equity Lines of Credit).
Equity in your home is as good as cash, right? Wrong! When you take out a line of credit on your home, you're just digging yourself a deeper hole and potentially putting yourself at financial risk. Here's why:

1. HELOCs are debt. You're borrowing money, which further compounds the problem. When you're borrowing money to make a payment and eventually have to start making payments on the amount you borrowed, there's something terribly wrong.
   
2. They may disappear. Since the financial crisis of 2008, the rules and availability of HELOCs have changed. If you're banking on being able to borrow and that is your only option, you might be in for a rude awakening. You'll have no cash and no HELOC.
   
3. You put your home at risk. While serving overseas, it was imperative to have constant security on our base to keep potential threats out. Taking out a HELOC is as potentially dangerous as it would have been to allow anyone on our base before inspecting him or her. With a HELOC, you use your home as collateral. What happens when you can't make the payment on your HELOC because you lose your job? You'll get a true taste of what it really means to “sleep in the field.” You will lose your home. It's not worth the risk until you have a sufficient savings account.
   

Imposter #3: Payday Loans.
Take out one of these and you'll have easy access to cash with an equally impressive interest rate, somewhere between 200% and 500%. I witnessed one that carried a mind-numbing 521%! Payday loans carry all the problems of a credit card multiplied many times over. Many people who get sucked into these loans fall into a vicious cycle that's harder to break than a nicotine habit.

Imposter #4: Your Stuff.
Have you ever thought that if things get really bad, you can just head to the pawnshop and hock your goods? Don't bank on it. Right now pawnshops are overrun with people thinking the same thing, and they are leaving disappointed. If you think you have liquidity because you own an iPod, you will be shocked when you learn what it's worth. You'll be lucky to get 25 percent at best. Do you think your gold-plated pendant will help pay the next light bill? Good luck. It's likely you won't get a dime for it.

I mentioned earlier how eventful my first patrol in Baghdad was. To prepare for that day, it was important that I knew the terrain and what to expect. To get a feel for the area, I went over the route with a veteran team the day before. In combat, you can never be too prepared. Knowing that lives could be lost if we weren't ready was incentive enough.

The particular road was one of the hottest in Iraq; a major incident had occurred there every day for the past two months. To say my adrenaline was high would be an understatement, but I was with guys who had been there.

I was also with guys who had become complacent. I sat in the back of a Humvee, observing landmarks along the route and taking mental notes. In front of me, the squad leader's head slumped back and his eyes closed. A minute later, his mouth was open and he started snoring.

This must be a well-trained team, I thought, if the leader trusts them so much he can take a nap in one of the most dangerous areas in the country. I wasn't sure whether to be impressed or afraid. The question was answered soon, when I noticed that the gunner in the turret was snoozing, too. I guess he figured that if it was okay for the staff sergeant, it must be okay for him. Except, this was the guy who was supposed to be on alert for potential problems along the patrol route. That was the whole point of this exercise. Thank God the driver stayed awake—he was the only one. And thank God nothing happened that day.

That experience left me bewildered. How could anyone be that nonchalant when so much was at stake? I couldn't understand it. When it comes to financial security, I see the same thing repeatedly. The establishment of emergency funds is one of those areas in which complacency proves to be commonplace.

I suppose it's the fact that most of the time nothing happens, and, after a while, people assume nothing
will
happen. They tell themselves, “Yes, I need a reserve fund in case something happens, but I'll get that done tomorrow. There's plenty of time.” Then the transmission goes and there's no means to fix it without using a credit card. Or the boss hands out pink slips at work. And there is nothing to live on.

To be successful, you must be vigilant. Not even an act as simple as putting money into a savings account should be taken for granted. Shop around and explore your possibilities. Don't assume you're getting the highest interest rate at your local institution.

It's true that savings accounts pay next to nothing anyway. They are not the kind of investment that will make you rich. Keep in mind that the primary purpose of keeping your FRAGO Fund in savings is so you can access it quickly if you need it. That doesn't mean, however, that you should not take the trouble to get the most out of it. Here are a few considerations when building up a savings account:

• Make sure you have enough in your savings account.
  If there isn't enough to cover your emergency expenses, it won't be a very useful fund in the event of an emergency. Be aware that many banks charge a fee if your average balance falls below a certain point. Learn what that amount is and keep your account balance above it.
  
• Make sure you get the best interest rate possible.
  Nothing says you have to put your money in the bank on the corner. Shop around. Check other banks and institutions, including online institutions, and find the best return for your money. You might as well make something on it. (For more ideas about where you can get the highest interest rates around, please refer to
  www.soldieroffinance.com/resources
  .)
  
• Make sure you don't have too much in your savings account.
  The first consideration, of course, is to make sure you have enough to live on for at least a month. A little more than the minimum is good, but if you put too much in the account, you will have your money sitting around without giving you a good return on investment. This was a problem I faced early in my career. My wife and I understood the importance of a reserve for emergencies, so we tucked away a sizable amount of money. But we realized later that we could have gotten much better interest rates if we had shopped around a little more.
      Some people have what I would consider an exorbitant amount in savings. There are other investment options paying a much higher return. We'll explore some of these options in the upcoming chapters. You really don't need much more than three months' expenses in your emergency fund. That allows plenty of time to liquidate other investments if necessary.