A Definitive Guide to Being Financially Prepared to Commission

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

November 11, 2023

Perhaps you’re in your final months of college or perhaps you are a newly commissioned Lieutenant or Ensign. Either way, you will have started your professional training, be leading soldiers, sailors and airmen, and…. beginning your first career. You will have a paycheck and be in a unique situation of earning a competitive and steady salary (some of it tax free!) while having little debt.  I was an officer in the Army for five years and have spent the past several years as a financial planner serving hundreds of clients in the military. I offer some advice and direction from experience, mistakes, successes, and relationships with other military officers to hopefully make your transition from cadet and college student to officer and professional as smooth as possible.

The following is list of items that may be top of mind for you. If they are not, they absolutely should be. I have included helpful links to resources, blogs, and tools to assist you in learning more and getting your financial plan going. This may be a list you look back on in the months after you commission. Here is how you can commission and be ready financially:

  1. Be mindful of where you receive advice.  There are many organizations (I will not name them, but you may already be aware) out there who target cadet senior classes as a sales strategy.  They may offer “free” financial advice, but this usually turns into a sales pitch.  Two dead giveaways here, the first is the “free” financial advice.  No professional would offer their high demand services for free except maybe for close friends or family.  The second will be, some part of working with them will be contingent on purchasing a proprietary product.  An example is, they work for XYZ insurance company and say, “You need to buy XYZ” insurance.” Or maybe they are with ABC bank and all the products they recommend are run by ABC bank.  Those two red flags can help steer you away from a bad decision. Look for fee-only, fiduciary planners. The term Certified Financial Planner™ is a good start if you ever find yourself in search of some financial advice. Do you need a financial plan? Read here: When Do I Start My Financial Plan?
  2. By this point, I am guessing you have taken the Cadet Starter Loan from USAA or Navy Fed. At least, I sure hope you did.  This loan is the best deal in the history of deals, IF you invest most if not all the loan.  Let me illustrate for you:
    • Example one: the loan of $36,000 invested all at once.  No further investments were made… EVER! After 40 years and averaging 9% return, your account is worth $1,130,739!! A return of nearly $1.1 million!!!
    • Example two: You do not take the loan, but choose to invest the $36,000 over the first five years so, $600/m.  You then stop saving after the 5-year period.  You still do very well and end up with an ending balance of $921,953 after the same 40-year period.
    • That is a difference of $208,786. And the loan that enabled that extra $200k, cost you a total of $700 of interest over five years.  The cadet starter loan is a slam dunk, IF you can invest most of it. 
  3. Budgeting– Save First!!  Make a practice budget based on your 2LT income and your first duty station. Guess what, you now must pay for things like rent, utilities, insurance, groceries, etc.  This budget will allow you to do a couple things: first, save what you need to for the future. And second, spend on having a good time and enjoying life. If budgeted, that spending will be responsible. You will have such a solid income out of college and will be able to both save aggressively and enjoy life- please budget and do both! A very good rule of thumb is to spend 50% of your pay on NEEDS, 25% on WANTS and the other 25% to SAVE. 50-25-25
    • Quick Example of a new LT living in Del Rio, TX: $3,477/m or$41,725/yr of base pay $1,350/m or $16,200/yr of tax free BAH and BAS. So total monthly is $4,827.  Using the 50-25-25 rule, you spend about $2,400 on rent, utilities, groceries, phone bill, taxes, etc.  You spend $1,200 on fun, eating out, traveling away from Del Rio, Amazon purchases, etc.  The other $1,200 goes into your TSP, Roth IRA, savings account, and brokerage account.
  4. State Taxes:  Be aware of the tax laws of where you are moving and attempt to establish residency if you are in a state that has no income tax OR a state that does not tax active-duty military pay. This can save a few hundred dollars a month in tax expenses.
    • For tax purposes, you simply must establish legal residence with the military.  If you are paying state income tax and move to a state where taxes would be more favorable, here are a few things you can do to attempt to establish legal residence:  you can buy a home, register to vote, register your vehicle, update your will to reflect that state’s laws, among other things. Read more here: Legal Residence and Home of Record
    • There are also state tax benefits if your spouse is not in the military: Spousal State Tax Rules.
  5. Establish Credit:  Contrary to popular belief, you will need a good credit score at some point in your life.  Contrary to some other popular beliefs, a good credit score is in no way, shape or form, a sign of financial success.  Bottom line, a good credit score gets you lower rates when you buy a house, a car, or apply for a business loan.  It helps.  The best way to start is to get a small credit card and decide to use it for a certain part of your budget. Treat it like cash and pay it off. NEVER leave a balance. AMEX has some awesome military benefits on their cards and USAA can be a great place to get a starter card. Your cadet starter loan will help build credit as well. Don’t overthink this one. How Your Credit Score is Calculated.
  6. Car buying: A good rule for cars, buy them and drive them as long as you can. With that being said, DO NOT go and buy a car that will cost you several hundred dollars a month to finance and upkeep (new sports cars, old European makes, lifted trucks, etc.).  That would be a mistake and you would be forfeiting a huge opportunity to invest and save early in your career. Buy a reliable used car.  There is likely little need for a huge SUV or decked out truck.  Get a vehicle that will get you from point A to point B. There will be steady and generous cash raises nearly every year during your military career.  Use one of those opportunities to upgrade the car down the road.  Promotion to CPT (O-3) is a good window. I promise, no one cares about what kind of car you drive. It is not a measure of financial success in the slightest.
  7. Life Insurance: Through the military, you have SGLI. You are insured for $500k at an incredibly low cost – about $25/m. Even if you are single, I’d advise taking SGLI because of the HEART ACT. Read more about that here: The HEART ACT If you are getting married right after graduation, wanting to start a family quickly, becoming a pilot or going into special operations, you may want to consider for insurance. Obtaining life insurance from most companies is difficult for pilots (pilot candidates), however there are certain organizations that will sell life insurance to pilots and special operations professionals without added costs. If you are a future pilot who falls into the family planning category or find yourself simply wanting/ needing more insurance, then shop around with good insurance companies. Great Life Insurance Companies If not, don’t worry about anything above SGLI for now. Another case for getting insurance early on is to lock in insurability. This just means you get some insurance even before you need it because your health may change and make you ineligible for insurance later on. This reason is very subjective and may vary from person to person. Here is a link to a company that issues insurance without added cost for pilots and Special Forces: AAFMAA

  8. Build an emergency fund.  This is a cash savings that sits in a high yield savings account.  It should be your monthly expenses multiplied by three.  So, if you pay $4,000 a month for rent, food, leisure, utilities, and insurance, you should have around $12,000 sitting in a high yield account. High Yield accounts should be FDIC insured, no minimum balance requirement and no time requirement (like a 12-month lockup period). Here are some examples: Nerd Wallet Best High Yield Accounts 2023
  9. Invest in the TSP:  If you commissioned after 2018, you are under the Blended Retirement System which, as far as the TSP is concerned, means you begin receiving a match at the start of year 3. The government’s contribution can go as high as 5%, so right after you commission, login to MyPay and allocate AT LEAST 5% of you pay to the ROTH TSP. you will get a 1% government contribution during years 1 and 2 that jumps up to 5% in year three and beyond.  The max for this account is $22,500 (in 2023) so you can obviously defer way more than 5% if your budget allows. There are limited investment options in the TSP and everyone’s situation is slightly different, so this is not investment advice.  Generally speaking, young investors want more stock fund focused allocations as this increases your chances for better long-term returns.  If this aligns with your goals, you can look at a Target date 2060 fund or splitting your allocation between the C, S, and I funds to some degree. Individual funds can be a better option, but only if you plan to monitor the account to some degree.  You will set up the amount you put into the TSP through MyPay, you will set up how you invest through: https://www.tsp.gov/
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  1. Investing outside the TSP:  Some of you may enjoy stock trading and more power to you. Keep a small amount set aside for that hobby (because that is all it is for 99% of people). For the investments you intend to plan with and count on in the future, use an allocation of index funds and ETFs. For an explanation, click here: What is an Index Fund?   These investments are incredibly low cost and diversify your risk appropriately.  Read About Diversification If you use a financial advisor or online tool, odds are you can simply worry about allocating funds toward an account and the investment across the portfolio of funds will taken care of for you. Good online tools are Betterment, Schwab Intelligent Portfolios, and Fidelity Go.  Here are two account types you may want to consider outside the TSP:
    • Roth IRA– additional retirement account that you can use even after you leave the military.
    • Individual Non-Qualified Account– an account that has little tax benefits but is incredibly flexible. Read more here: Should I Have a Taxable Brokerage Account?
  2. Stocks, Bonds, and Exchange Traded Funds (ETFs):
    • Stocks: This represents ownership of a company. If you own a share of stock in Apple, you own the company.  As it makes money, your stock price grows, and you may receive cash payments called dividends. If the company fails or does not meet expectations, the stock price will decline. Ownership of a diversified basket of stocks is the most proven way to grow wealth long term.
    • Bonds: Are ownership of debt.  Think of how you will pay USAA, .7% per year for your Cadet Starter Loan.  They receive income and only lose money if you do not pay back your debt.  Their return is capped- in the case of the Cadet Loan, severely capped, but the risk is pretty low. Bonds are meant to be more midterm when you are ok with not getting as high or potential returns and simply want to protect your investment.  Typically, not a great long-term strategy, but has a place in the short and mid-term investments.
    • ETFs, Index Funds and Mutual Funds:  All of these represent a basket of stocks or bonds.  So instead of picking three stocks, you buy one ETF that owns 500 stocks.  This immediately diversifies your investments and lowers the risk of one bad stock pick blowing up your plan. For more on diversification, read here.
      • There are two main categories of these types of investments: active and passiveActive means the mutual fund or ETF is run by actual people who are picking specific investments in an attempt to beat some benchmark. You typically pay mor in fees for this potential.  Passive has no stock picking involved and invests the portfolio based on a preset benchmark.  So, an S&P 500 Index Fund owns the largest 500-ish companies in American and will include or exclude companies, not at the whim of a manager, but only as the index changes. These funds are typically very low costs.
  3. Your Behavior as you Invest:  It is important to note, as far as investing is concerned, that investments in stock-based funds will not simply be a smooth ride upward.  It will consist of a lot of up and down movements with no predictability in the short term.  In the long term, however, we see trends play out, time and time again. Look at the chart below.  The green bar represents investments in the largest 500 stocks in America (Apple, google, Microsoft, United Health, Home Depot, etc.).  The first period on the far left measures one year.  So since 1950, stocks have gone up 47% and down by 39% and everything in between in any given 12 months.  A fairly wide range of outcomes.  Skip to the 20-year period on the far right.  In a 20-year period, stocks have averaged 6% annual returns on the low end, and 17% on high end… never negative.
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  • What does that tell us about investing? A huge part of it is simply continuing to do it over a long period of time. When you allow your investments time to work, your chance for success increases greatly. My best advice is to set up a system for investing at regular intervals, ensure it is allocated automatically and properly, and let it be.
  • Mistakes Investors Make
  1. Save Early and Often:
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  • This chart will show why saving early is important, and while rate of return is important, the rate of savings matters much more for young savers. The Save Early Scenario (Orange Line) and Save Later Scenario (Purple Line) both have $181,000 of contributions, but the orange is worth $2.218m and the purple is worth $689k.  So, what is different?  In the Save Early Scenario (orange) you save $1,000/m from 1990- 2005.  So, 15 years.  In the Save Later Scenario (purple) you save for 15 years, but start in 2005 and continue through 2020.  Still 15 years.  By delaying the exact same effort for 15 years, you missed out on $1.5m of potential value.  Save early and often!! Do not get so focused on rate of return that you miss your savings rate.
  1. Real Estate: There is a massive amount of pressure in the military community to always buy a home.  Renting is looked down upon. I’m here to tell you, both are viable options. I want to keep this very simple:
    • As a renter, the absolute maximum you will pay monthly is your rent.  It will never exceed that.  For this assurance, you do not have to worry about maintenance, renovations, taxes, and transaction costs when it comes time to sell.  You will never get to participate in the upside if the property you rent goes up in value. 
    • As a buyer, your mortgage payment is the absolute minimum you will owe monthly.  There may be repairs, tax increases, renovations, etc. All come out of your pocket. To buy and sell, there are realtor fees, closing costs, inspections, furnishings, etc. If you rent it out, you will receive income, but still are on the hook for 100% of the expenses the property incurs thus, the whole ownership may result in you losing money. The potential upside is that as you pay off the loan and over time, as the property appreciates, you can recoup some of your capital and even make money. Owning a Home is Not for Everyone
    • Neither option is right or wrong.  If you want to own a home for over a decade, go ahead and feel comfortable buying.  If you want no strings attached easy living with the ability to break a lease and save 100% of your BAH when you deploy, then rent.  In either case, make sure you are living within your means.  Consider having roommates early on as this can really allow you to optimize your monthly expenses.  There is no rush to buy a home and no shame in renting.
    • Much like the stock market investment chart, if you have a long-time horizon for home ownership, it increases the opportunity to recoup living expenses and make money when it comes time to sell.  The shorter the time horizon, the less of a case that should be made for owning. Home Buying Guide
  1. Live Life: Life is more than work; it is more than the military and it is more than finances.  Everyone commissioning comes from different walks of life. Some have trust funds and family endowments, some are from middle class midwestern families and others will be the first college graduates in their family tree.  Do not compare what others have or what they do to your own situation.  Comparison is the thief of joy.  You will not be able to adhere to a financial plan and enjoy what you do if you are always comparing account balances, possessions, vacations, and promotions with others.  Your financial plan may differ from your friend’s and from your parents’, and that does not necessarily make it wrong. Make a good plan and then spend your time enjoying life with those you love and being generous with your time and talents.

My goal was for this to be extensive, yet simple. Some of these, you should be able to action on right away, some of the items will be in the months immediately before or after graduation. My hope is that I have given enough information and resources to start your journey as a military officer on the right financial footing.

Helpful Tools

What Will My Investment Be Worth- Calculator

Asset Allocation Calculator

Rent vs Buy Calculator

 Roth IRA Calculator

Budget Template

Budget Template Alternate

Mortgage Calculator

*No link or reference in this article is a recommendation or promotion of any firm, service of product. Not personal financial advice. No guarantees or expectations should be made from past investment performance.*


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