Save Like a Squirrel—It’s Not Nuts!
Every Little Bit Adds Up
February 24, 2014 by David Khan
We’re celebrating Military Saves Week at Pioneer Services by sharing a trio of blogs that show you how to save money. This is the first one, and it tackles the importance of saving for retirement.
When I joined the military over twenty years ago, the average E-2’s monthly base pay was about $900 per month, or $450 every paycheck (before taxes) and nearly $11,000 each year. That definitely wasn’t a lot. Today an E-2 makes nearly $1,700 a month, or $850 every paycheck (again, pre-tax), which adds up to just over $20,000 a year. Almost double what I made my first year but, by today’s standards, it’s still not a lot of money.
Granted, it’s not too bad if you’re a single person who lives on post. I know I couldn’t wait for payday to cash my check and go shop for new clothes, a CD, or go out with my friends. But by the midpoint of the month I’d be out of money and eagerly waiting payday again.
Perhaps this cycle sounds a little familiar.
It was a bit later that I learned why squirrels are pretty smart economists. Honestly. When it comes to saving up for the future, we could really learn a lot from how our tree dwelling friends spend their entire day scurrying around collecting nuts—instead of gorging themselves during the spring and summer months, they eat some and save some. Pretty sage little creatures.
And they could teach us all a lesson about the benefits and rewards of being prepared for the future.
Starting small and early
You don’t need a lot of money to start saving. For example, if instead of spending $10 on the latest CD every two weeks I had saved that money in a simple interest-bearing account that earned just 1% interest a month, I’d have wound up with more than $5,000 in 20 years. That might not sound like much, but it really is when you consider my $4,800 of savings would have earned me an extra $500 or so for doing absolutely nothing thanks to the interest the account earned.
How would I fare in the same setup if I was an E-2 today and sacked away $100 a month? I’d end up with more than $26,000! That obviously isn’t enough to retire on, but my money would have made me over $2,500—again, for doing nothing but sitting in an account due to the interest accrued.
But if I had managed to save $500 a month in my account (again, compounded at 1% monthly) for 40 years, I’d end up with nearly $300,000. Now we are starting to see some real growth.
What these numbers show:
- When you save little amounts regularly, your money winds up working for you.
- The power of compounding interest, which is when interest is reinvested into your savings, helping your money grow even faster.
- The earlier you start saving the better! The longer your money has time to sit earning interest, the more you’ll have at the end.
Nobody retires as an E-2. And as we are promoted, we earn more, which creates more opportunities to save larger amounts and accelerate net wealth.
For example, if you get promoted from E-2 to E-4 after a few of years in the service, the difference in pay is nearly $500 a month. Maintain the same standard of living (e.g., don’t go out and spend that each month) and you could really kick your savings into high gear.
Use extra pay wisely
Base pay obviously isn’t the only thing service members are entitled to—Hazardous Duty/Imminent Danger Pay, Flight Pay, Dive Pay, Sea Pay, Hazardous Duty Pay, Submarine Pay, Reenlistment Bonuses…all are additional sources of pay and great opportunities to save. If you’ve served in a tax free zone, that too creates an amazing source of revenue for your savings strategy. Service members now have much better tools to save even more than ever before.
Think long term
The Thrift Savings Plan (TSP) offers a great way to enhance a financial portfolio by taking before-tax pay and investing it into various plans that sometimes offer a higher return on investment than a simple savings account. When signing up for the TSP, you can contribute a specific dollar amount, a percentage of total pay, or your specialty pay.
My personal strategy was to invest my flight and tax-free pays into my TSP account, which have become pretty sizable amounts to contribute. The great thing is that I haven't missed having that money because I've done this each month since I joined.
There are plenty of other ways to invest for retirement, including Roth IRAs and more. For additional information on all the TSP programs, go to http://www.tsp.gov.
Now go nuts (with saving)!
The simple take away is: be a squirrel. Stash away as many nuts as you can, as often as you can, and avoid the temptation to remove them early (even when a storm rolls through temporarily). Doing so might help you have some financial security after your military career has ended and even later on when you’ve transitioned into full retirement. So start saving now–it isn’t nuts!
Be sure to check out some of our other blogs on how to save money:
How to Lower Your Bills
Grocery Shopping Savvy
Thrifty Travel Ideas