Financial Literacy for USNA Midshipmen and Young Officers

By LT Sam Casey

So, you just got your two-for-seven loan. What now? While teaching at the Naval Academy, I’ve had quite a few Midshipmen and Ensigns ask for a brief on finances. I boiled down the brief to some key points below to help Midshipmen and young officers to maximize their money and gain some insight on common financial issues in the fleet.

1. Spend Less Than You Make: In order to save money, you need to know how much you spend. I recommend doing this by reverse budgeting for three separate months: the last month, a month during a different part of the year (summer vs. semester), and the month you spent the most. Reverse budgeting requires you to go through all your charges and see how much you actually spent on what. Split your finances into food, alcohol, bills, hotels, Ubers, etc. I recommend using monthly statements for consistency. Once you know your monthly spending, make sure you aren’t over investing or decrease your spending. Make a budget for next month and see how closely you can stick to it.

If you are budgeting for after you graduate, check these websites for how much an O1 makes and BAH in your future duty station.

2. Minimum and Maximums: Every upper class Midshipman should have three accounts: checking, savings and credit. The bare minimum you want in your checking account should be enough to pay for one month of expenses. When I was a Midshipman that was 2,500$. When I was an Ensign, I raised my minimum to 5,000$ to include rent. Never let your checking go below your minimum.

Now calculate your maximum for your checking account. This amount is the number that will tell you when to move money to your savings or invest. I normally do 2–3 times the minimum.

Once you have your checking account situated, calculate how much you want in your savings. This amount should include all short term expenses (within a year; weddings, spring break trips, Christmas gifts, etc.) and emergency funds. A rule of thumb for emergency funds is enough to live off of for 3–6 months plus the deductible for your car insurance. Once your savings is at the amount you want, start diversifying your portfolio (discussed below).

I recommend Midshipmen get at least one, but preferably two, credit cards to start building your credit. Your credit score takes into account the following: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), Credit Mix (10%) and New Credit (10%). Two credit cards will help your Length of Credit History percentage. I use my cash rewards card for everything and pay it off each month. I have a separate credit card that I use for one purchase a month to keep it active.

Now that you have your checking, saving and credit accounts in order, let’s discuss what to do with the extra money from your two-for-seven loan and nuke bonus. Here’s how I’d recommend diversifying your portfolio:

1. Pay off any high interest debts early: This probably only applies to you if you went to college prior to the academy or bought a car from a predatory lender. High interest debts are greater than 5%.

Tip: If you are getting a new car, I’d recommend ensuring you get a reasonable interest rate and paying it off in installments rather than all at once to help your credit score, specifically your Credit Mix percentage. If one of your Sailors or you have a predatory loan, the Navy Marine Corp Relief Society and the Servicemember Civil Relief Act can help you or your sailor get out of the loan.

2. Retirement: Max out your IRA if possible. First, put at least 5% into your Thrift Savings Plan (TSP) to get the max match from the government. Then, calculate how much you need to put into your TSP (or an IRA with a different bank) to max it out. Here’s a refresher of Roth vs Traditional IRAs. Most people recommend Roth IRAs, since we all assume we will be making more money in the future.

Tip: If you or your Sailor is struggling financially, you can take out a low interest loan against your TSP. Use this option after you’ve exhausted all other options.

3. Long-term goals: Determine if you want to buy a house on your first tour. How much of a down payment do you want to make? If you are getting married quickly after graduation, account for the wedding costs. When do you plan to get your Masters and how much will it cost? Earmark all this money and invest it somewhere that you can withdraw it when the time comes (high yield savings account, Certificate of Deposits, T-bills).

4. Stocks, bonds, ETFs and index funds: I recommend investing in the stock market in three ways:

A. Use a money manager: get a recommendation from a friend, your parents or an Officer. Conversely, you can set up an appointment with a place like Edward Jones for free and see if you want to use them (strongly recommend using the free meeting, it is extremely beneficial).

B. Applications where you trade whole stocks like Vanguard or Ameritrade. Use these apps for larger investments (normally I buy in 1000$ increments).

C. Applications where you can buy partial stock like Stash, Acorn or Robinhood. I use Stash for small investments (50$) and for companies I have a consumer attachment to (Phillip Morris for my Marlboros, Coca-Cola for my Monsters and Anheuser for my Bud-Lite). Similarly, if I think I can jump in on stocks that change seasonally, I’ll try it out here before spending big money on it.

Tip: I recommend using an app like CNBC financial app to research the companies.

5. Property: Plan when you want to buy a house. Then buy the house. Financially, first tour is a good time, but personally I recommend second tour so you can get used to apartment living for a while. Check out information on the VA Home Loan here. Think about buying land if houses are out of your price range.

Final notes: When your Sailors or Marines are in financial trouble, know the questions to ask and where to send them. Ask how much debt they have through credit cards and loans. Ask what their interest rates are. Ask them if they want help budgeting. Take them to the Command Financial Leader (CFL) for more advice and make a budget with them. Take them to the Navy Marine Corp Relief Society. They are a fantastic resource. Most importantly, don’t forget to check back up on them a month later. Are they sticking to their financial plan? Knowing the basics of Financial Literacy will be crucial for you as an officer and leader.

By Sam Casey

LT Sam Casey is a Military Instructor in the English Department at the United States Naval Academy. She enjoys sailing, playing rugby and writing poetry.