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Digging Out Of Debt, Investing In The Future

By Suzanne McAuliffe

Summer 2007

Air Force Maj. Brad Coley and his wife, Dawn, love to travel. It’s a good thing too. Since they married in 1997, their military careers sent them to four different states and one foreign country. But last year’s move from South Dakota to Illinois created more stress than usual.

One key question nagged them: Could they afford a large down payment on a new home while continuing to save for retirement and pay into their then two-year-old’s college fund?

Dawn, a former Air Force captain and part-time pharmacist who handles the family’s finances, didn’t waste time finding out. She called a financial advisor for advice. She learned that not only could she and her husband afford a new home, but they could put 20 percent down without sacrificing their retirement and education investments.

The ability to make a 20 percent down payment on a home would keep the Coleys from paying private mortgage insurance (PMI), which lenders generally require on small- or no-down-payment loans.

Just A Few Tweaks

But more questions followed. Did they have the right investment mix? Could they do a better job of saving? Should they cut back in other areas?

Art Vangeli, a USAA Financial Planning Services expert, made a surprising discovery.

“Art said we were doing great, but that he’d never seen anyone invest that aggressively at our age (30s),” Dawn says. “He said we needed to be more moderate to preserve money for our down payment.”

To do that, Mr. Vangeli suggested minor adjustments: moving some money into bonds, decreasing their monthly college fund contributions from $200 to $150 to avoid paying more than they needed to into the 529 plan, and enrolling Dawn in her employer’s 401(k) plan at the maximum level.

Looking Back

When the Coleys married, their student loans, car loans and credit card debt totaled $60,000. Both were active-duty Air Force first lieutenants living in Spokane, Wash. A month after the wedding, they received orders to move to Los Angeles, where each was promoted to captain.

They couldn’t afford a house in California, so they lived cheaply and made a pact to pay off their debt as soon as possible. Two years later, they met their goal.

When their next military assignment sent them to Turkey, their finances got a jump-start. Being stationed in Turkey qualified them for combat-zone exclusion status, so not only did Dawn and Brad not have to pay tax on their income, but they could also participate in a special savings program offered by the military that guaranteed a 10 percent return on money put into a savings account.

The Savings Deposit Program (SDP), first established during the Vietnam era, enables servicemembers serving in designated combat zones to earn 10 percent interest per year on up to $10,000. Interest stops accruing 90 days after leaving the combat zone. (Learn more about SDP by reviewing the Department of Defense Financial Management Regulation, Volume 7A, Chapter 51 at www.dod.mil/comptroller/fmr.)

Dawn and Brad didn’t pass it up, each dumping $10,000 into savings. With no debt and no kids at the time, their nest egg began to grow quickly.

Retirement And Beyond

The Coleys recently learned they’ll be moving yet again this summer. Brad, a logistics readiness officer, was hand-picked for a 10-month professional military education program at the Air Command and Staff College in Alabama. After that, they’re not sure where they’ll be.

But one thing is certain: They plan to retire by age 60 and travel to every continent at least once.

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Suzanne McAuliffe is a senior writer/departments editor at USAA. This is an edited version of an article that appeared in the Spring 2006 issue of USAA Magazine and has been reprinted by permission of the company. USAA is a diversified insurance and financial services organization that has served the military community since 1922. USAA Financial Planning Services, one of the USAA family of companies, refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency, and its wholly owned subsidiary.

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Home Buyer’s Checklist

• What monthly mortgage payment can I realistically afford?
• How long do I plan to stay in the home?
• Do I expect my income to rise during that period?
• How much do I have saved for a down payment?
• What other sources do I have for a down payment – family loan, savings account, etc.?
• How much money can I commit to points and fees?

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Jump Off The Investing Starting Line

Like losing weight or going to the gym, once you decide to invest, you’ll find the time. Remember these five easy steps:

1. Speak the language. The more you learn about the different types of investments, the less fear you’ll have about getting started.

2. Know what you’re working toward. Your goals will help you pick the right asset mix for you among stocks, bonds and cash. It makes a difference whether you’re saving money for retirement or your first home.

3. Max out your savings plan. Automatically investing through your 401(k), 403(b) or TSP retirement plan is the fastest and easiest way to start investing. Take full advantage of these tax-deferred investments.

4. Stay diversified. Asset allocation and index funds are great places to keep the proper balance between stocks and bonds as you near retirement.

5. Go easy on individual stocks. Stocks may sound easy, but limit the number you own unless you have plenty of time to research and monitor your holdings on a regular basis.

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