Luke Pontzer 5/30/23 Luke Pontzer 5/30/23

Credit Cards 101

Let’s talk about credit cards. Seemingly essential in the wallet of the American consumer, credit cards can be used to get ahead financially by earning points on purchases you make and providing certain purchase protections that would not be available if you used cash, as well as helping to build your credit score. However, the flip side of these nifty plastic rectangles is that Americans carry approximately $986 billion in credit card debt, according to Federal Reserve data from the 4th quarter of 2022. This debt often comes with extremely high interest rates and can potentially hurt your long term financial goals. Therefore, if you choose to use credit cards after doing your research, I encourage you to do so responsibly.

What is a credit card?

Most people know credit cards are plastic (or metal) rectangles that you can use to pay for things. But how does the system actually work, and what distinguishes a credit card from a debit card? When you swipe your debit card, the money is immediately deducted from your bank account to pay the merchant. A credit card is essentially a form of short-term loan from the credit card issuer (Visa, Mastercard, American Express, etc.) to the cardholder (John Smith). When John swipes his credit card, no money comes out of his bank account at that moment. Visa puts up the money for the purchase and in return, John agrees to repay Visa the money he has spent on his credit card during the billing period (usually a month). If John does not repay the issuer the money that he owes, Visa will begin to charge interest (usually at very high rates) and other fees, which can add up very quickly to take a lot of money out of John’s pocket. Additionally, not paying each month or running up an excessively high balance can quickly start to hurt John’s credit score, which will affect his ability to buy a house, car, etc. Therefore, if you choose to use a credit card, it is essential that you pay the entire balance each month if at all possible, to avoid paying additional interest, fees, and hurting your credit and financial future. If it’s not possible for you to pay the whole balance, you should seriously consider getting rid of your credit card or rethink your spending habits.

Credit Card Pros

Credit cards can bring open a number of benefits to the cardholder. The most obvious benefit is the convenience of being able to carry a single piece of plastic, instead of lots of cash, in order to pay for daily transactions. Additionally, credit cards are an easy way to start to build or rebuild your credit score. They help with a number of credit score factors, including credit limit, utilization, and average credit age. Many credit cards give you a certain percentage of your transaction costs back as points or other rewards. These rewards can also be given in the form of a sign-up bonus, usually after you sign up for the card and spend at least a specified amount. They want to incentivize cardholders to spend on their cards instead of other cards, because they take a percentage of every transaction that goes on a credit card. These points can be used as cash back, or for travel, dining, gift cards, etc., depending on the card. Some credit card users are able to optimize their spending on certain cards to get free or almost free vacations, a practice known as travel hacking. I’ll talk more about travel hacking in another post dedicated to that topic.

Credit Card Cons

Psychologically, it is easier for most people to spend money from a credit card than by counting out cash for a purchase. This means that some people may accidentally spend more than they intended to or budgeted for, especially since your bank account balance does not immediately reflect the purchase. Spending more than you planned for can lead to carrying a balance, otherwise known as credit card debt, if you are unable to pay off your credit card bill at the end of your billing period.

As I stated before, Americans carry an incredible amount of credit card debt. This debt can hurt consumers in a number of ways. It normally carries high interest rates, meaning cardholders will end up paying much more for their purchases than the sticker price, as they could be paying interest for months or years after if they choose to carry a balance. Additionally, carrying this balance can hurt your credit score by driving up your credit utilization, and potentially hurting your payment history as well, should you choose to not even make the minimum payment. Additionally, many credit cards come with fees, either for late payments or simply for the privilege of having the card. This means it costs consumers money to use their own money. For military members, this impact may be lessened as many issuers waive their fees for those on active duty and their spouses.

Are Credit Cards Right for You?

Some people are good at using cards for their benefit. They always pay off their balance and never pay any interest to card issuers. They spend in the right categories on the right cards, so they can build up lots of points, miles, or cash back. They are able to take advantage of many of the benefits their cards offer, ensuring that the benefits they get out of their cards outweigh any fees or other costs of having the card. We’ll call these people “credit card people” a term used by Caleb Hammer, a great personal finance YouTuber.

There are also people who are NOT credit card people. If you spend on your credit card without knowing you have the ability to pay for every purchase you make, or if you allow a balance to accrue because you forget to pay your bill, you’re probably not a credit card person. If you are constantly doing balance transfers to new credit cards to stay ahead of rising interest, you’re probably not a credit card person. If having credit card bills constantly hanging over your head stresses you out, you’re probably not a credit card person.

It’s okay to not be a credit card person! There is nothing wrong with it, but it is good to recognize financial practices that aren’t good for you in your current life situation. Also, just because you may not be a credit card person now doesn’t mean you never will be. If you are able to heal your relationship with spending and recognize the harm that credit card debt can cause to your financial future, you may be able to become a credit card person and use credit cards in a healthy way in the future.

Wrapping things up

Credit cards can be an amazing tool for building credit and getting great perks for travel and other rewards in the right circumstances. However, they can also present a great deal of risk for people who are unable to use them properly. Before you decide to get a credit card, or even if you already have one, consider the following questions:

Are you able and motivated to pay off the whole balance every month?
Are you able to feel a psychological impact from spending on a credit card as you are with cash, instead of just swiping away?
Are you able to justify any fees charged by your credit card issuer with benefits offered by the card?
Are you getting a card that is appropriate for your financial situation, and that will not cause you to get into financial trouble down the road (reasonable limit, etc.)?

If you can confidently answer yes to these questions, getting a credit card may be the right decision. If not, don’t panic! As I mentioned before, credit cards are not for everyone. If you are not a credit card person, either allow yourself to be okay with that, or ask yourself what steps you need to take to get to where you can confidently answer yes to the questions listed above and become a credit card person.

https://www.nerdwallet.com/article/credit-cards/credit-cards-101

https://www.youtube.com/@CalebHammer

Luke Pontzer 5/11/23 Luke Pontzer 5/11/23

TSP 101

Learn the basics of the Thrift Savings Plan and how your money can work for you during and after your service

Whether you’re shipping out for boot camp in a few weeks or you’re an NCO just catching up on your finances, you may be asking yourself: “What’s a TSP? How do I use it to invest my money? What’s a match?” If you’ve asked yourself these questions or others regarding the TSP, we’re going to break everything down so you can know where you stand and how to proceed with creating your ideal financial future.

What Is It?

The TSP, or Thrift Savings Plan, allows members of the military and other federal employees to take advantage of tax breaks while saving money for retirement, much like a 401(k) plan offered by private employers. So, depending on how you put your money into the TSP, you get to keep more of your money now or when you retire, instead of returning it to the government in the form of taxes. Additionally, depending on what retirement plan you are enrolled in, the government will contribute to your account as a part of your compensation package, allowing you to save even more for retirement than you would be able to on your own.

Contributions

Like many 401(k) plans, the TSP offers both Traditional and Roth contribution options. The Traditional method allows you to contribute money from your paycheck before taxes are taken out, also known as “pre-tax” money. This means that because there is less money in your paycheck to be taxed on after taking out your contribution, you will pay less taxes when you contribute to the TSP. On the other hand, Roth TSP contributions are made with money from your paycheck after taxes have been taken out, but before your paycheck hits your bank account. Since Roth contributions are taxed before they are contributed, all growth and withdrawals are tax-free, provided you withdraw the funds after the age of 59 and 1/2 years old, and they have been in the account for at least 5 years. Both types of TSP contributions go straight to your TSP account, and never pass through your personal bank account, meaning you don’t have the opportunity to spend it in the moment. This can be a psychological benefit that helps some people save for retirement, allowing them to pretend that the money they contribute does not exist, so they can leave it out of their budget entirely. One helpful tip for TSP contributions is that they are controlled from MyPay, not the TSP, so if you are looking to adjust your contribution levels, go to MyPay first.

Matching Funds

Agency match is a benefit available to many military members and government civilians, depending on your retirement plan. If you are enrolled in the Blended Retirement System (BRS) (or FERS for federal government civilians), TSP matching contributions are part of your compensation package. Basically, the government will match whatever contributions you make to your TSP, up to 5% of your base pay. Let’s look at an example. If you’re an E4 in 2023 with 2 years time in service, this means that if you contribute at least 5% of your base pay, the government will contribute $131.60 in matching funds each month to your account. Matching contributions will always be made with Traditional (pre-tax) money. What does all this mean for you? Making contributions to your TSP allows you to receive extra money each month from the government. Even though you can’t spend it immediately in most cases, you’ll be glad you saved and invested this money when you reach retirement age and your contributions (from yourself and Uncle Sam) have grown and compounded over the course of your life and are now worth much more than when you first contributed.

Investment Choices

This brings us to the final topic: how do you invest your money once it’s in your TSP? One of the benefits of the TSP over other retirement accounts is the fact that expenses and fees charged to participants are incredibly low. So you get to keep more of your money and let it continue to grow for retirement. Also, your investment options in the TSP are relatively simple. There are two basic categories: individual funds and lifecycle funds. Individual funds offer more freedom of choice for TSP investors who are interested in managing their own mix of investments. Users can choose a mix of the following individual funds:

G Fund: This fund is composed entirely of short-term U.S. government securities issued specifically to the TSP. It is extremely low-risk, as the U.S. government has never failed to pay its obligations. However, this also means that it has very little growth potential, so it’s best for investors who don’t like risk and are interested in preserving their money.

F Fund: This fund is invested in high quality U.S. bonds, both government and corporate, and tracks the Bloomberg U.S. Aggregate Bond Index. This fund has slightly more risk than the G Fund, but also more growth potential.

C Fund: This fund tracks the performance of the S&P 500, which is composed of the stocks of the 500 largest publicly traded U.S. companies. The C Fund has more risk, as recessions and other economic factors do affect the performance of its shares. However, over the long term, funds like the C Fund have shown some of the best steady growth potential for investors.

S Fund: This fund tracks the performance of the Dow Jones U.S. Completion Total Stock Market Index, which is composed of small-to-medium sized publicly traded companies not included in the S&P 500. Since the companies included are smaller, there is more risk, as smaller companies are less established and have a higher chance of failing. However, there is also a higher growth potential, because small companies are able to grow more quickly depending on certain factors.

I Fund: This fund gives TSP investors the opportunity to get in on the international action, tracking the Morgan Stanley Capital International Europe, Australasia, and Far East Index. This means TSP users have the opportunity to invest in most major developed international regions with their TSP funds, including some markets and customer bases not always captured by U.S. companies.

The other investment option for TSP users is the Lifecycle Fund family. There are 10 Lifecycle Funds that exist in five year increments (L2025, L2030, etc.). These funds contain a diversified mix of the individual funds (G,F,C,S,I). Each quarter, this mix of funds is adjusted to reflect an appropriate mix of risk tolerance and growth potential for that time in the fund’s lifespan. Newer funds have a riskier mix to expose investors to more growth potential, while funds that are closer to being cashed out when their investors retire are more likely to contain a mix of assets designed to keep accounts close to their current levels, with less risk of significant loss. Lifecycle Funds are usually the better choice for TSP users who are less savvy on investing. Users are able to park their contributions in the Lifecycle fund closest to their projected retirement year, then sit back and allow the financial professionals at the TSP to make the decisions on the appropriate investment mix. Whichever option you choose, it is worthwhile to examine your TSP at least once a year, to ensure your contributions and investment choices are consistent with your goals for the future.

The TSP also offers the opportunity to invest in mutual funds through a mutual fund “window,” but we will discuss this topic in a different blog post, as it is outside of the defined “TSP Universe”.

The default investment that your money automatically goes into unless you change it will be either the G Fund or the Lifecycle Fund most appropriate for your projected retirement year. Regardless of what you decide to invest in, it is prudent to consider your investment decisions at least once a year to ensure you are invested in assets that meet your goals for the future.

Final Thoughts

While the Thrift Savings Plan can be daunting for those who are unsure about retirement, personal finance, and investing, hopefully, this discussion has been informative and helpful as you make decisions moving forward in your career. Your TSP can be one of your biggest wealth building tools, and I strongly believe you should take advantage of it if at all possible! Please leave a comment with what you felt was the most helpful in this post, as well as other topics you’d like to see covered in future posts!