How to Build Wealth in the Military -- Without Sacrificing Your Lifestyle

"I don't want to sacrifice my lifestyle now!"

This is the Number One objection I hear when I recommend a budget and put a service member on a savings plan. Valid. And if you knew you were only going to live for another month, year, or maybe decade, then saving might make no sense at all. But within 10 years, you can build real, life-changing wealth that improves your lifestyle now and in the future.

An easy way to think of saving and building wealth is with a 1-to-10 scale:

• 1 = living at the Federal Poverty Level of $20,000 a year (yes, the same as an E-1's salary)
• 10 = total financial freedom (you can afford the life you want, whether it's $50k/year or $5 million)

Most people start at 1 and slowly over 40+ years work their way up to a 7 or 8. They never live a Perfect 10 lifestyle because they were afraid to work for it, and didn't have the goals or plan to make it to 10.

The problem is that most people live at the highest number they can afford. When they get promoted and their income lets them go from a 1 to a 3, they jump right up to living at a 3, even though they could have stayed at a 1 -- and not had to give up anything. A couple promotions later and the ability to live at a 5, and they're living at a 5. After 30+ years, they can afford a 7, and they live at a 7. Then they get old, retire, and die, never closing the gap from 7 to 10.

Achieving Financial Freedom by saving and building wealth is not a steady slope up from 1 to 7 or 8. It is living at the lowest number you can until you are ready to make the jump to 10. For most, this means living at a 3 or 4 for 15-20 years (like a military career), then suddenly "making it"; for the die-hards who really, really want it, they can live at a 1 for 5-10 years, then live a Perfect 10 the rest of their lives.

Living at a 1 out of 10 lifestyle is not what most people consider fun; once you can afford the 3/10 life and get a taste of it, it's hard to give it up. So how do you avoid living at a poverty level now so you can enjoy life, and also make sure you're saving enough to achieve greatness 10-20 years down the line?

Balance. The key is to not go from a 1 to a 3 as soon as you can afford it, but to go from a 1 to a 2. You get the promotion and raise, and you allow yourself to enjoy some, but not all, of the new income right now. The difference between a 2 and 3 in terms of lifestyle isn't a big deal -- but the money you can save by living at a 2 instead of a 3 can be life-changing.

After 10 years or so of living at a 1, then 2, then 3, and then 4, suddenly you realize you've built the wealth and can earn the passive income to keep on your climb to living a 10. The investment income in your non-retirement accounts will be enough to totally make up for, and maybe even exceed, the amount of money you're saving. By the time you're in your 30s, you will be caught right back up to everyone else, able to live that 5/10 lifestyle in mid-career, but because you slowed your roll in your 20s, you have the assets to keep on charging to a 10/10 while everyone else will never make it past a 7 or 8.

In other words, it's all about the first 5-10 years of your financial journey. If you have a bad plan or refuse to make some sacrifices during your 20s, you'll never reach your dreams.

Why Traditional Savings Plans Don’t Work

Traditional savings plans are designed to let you live at a 1-2-3-4-5-6-7 and then retire to continue at a lifestyle that is on a 5, 6, or 7 out of 10. It's like they've given up before they even started. This suckers most people because they get to level up a little bit every few years at a level as high as their paycheck supports, which makes them feel like they're going to "make it," even though there's no chance.

There's no chance because saving too little and only for retirement does not guarantee that you will actually ever have enough to retire into your Dream Life. The reason is that bogus advice like the "15 Percent Rule" for savings is the absolute bare minimum needed to retire by age 65. So most take this easy way (or save even less), and then they "green light" themselves spending the rest of their money now because they've been tricked into believing saving 15% is enough.

If you think you should get to spend as much as you can afford to spend and will ever get to live your Dream Life, let alone retire comfortably, you're fooling yourself.

To make the most of life now and in the future, you've got to do two things: spend less, and save less for retirement. Instead, save as much as you can afford, and stop saving everything for retirement. The more you save for non-retirement, and the faster you save it, the sooner you will have the wealth that allows you to move all the way up to the 10 out of 10 lifestyle.

The Military Advantage

Thanks to your military service, you're going to get the benefits and tax advantages that allow you to do this while still enjoying life now. The dollar value of the benefits plus the tax advantages mean you will come out on top financially compared to civilians whose salary is more than yours:

1. Tax-Free Income: Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are tax-free. The average payout in 2023 was $25,000, which for the typical single service member or dual-income military family in the 22% tax bracket has a cash value of $30,500.
2. Low Cost of Living: If you live in the barracks, you save on rent, utilities, and food. For a single 20-something American this is about $1,100 a month, or $15,100 a year in tax-advantaged value. If you aren't in the barracks, you're most likely living in a military town that is still affordable unlike many expensive U.S. markets where families have to spend 100% of their incomes just to get by.
3. Healthcare: Military healthcare is either free or very affordable compared to civilian plans. In 2023, the average civilian plan cost $8,435 for single people and a whopping $23,968 for families.
4. VA Loans: These loans allow you to buy a home with little to no down payment. A typical first-time home-buyer with average credit may need 20%, or $84,000, to make a down payment on an average-priced home in 2024. This can take 6-8 years of savings to set aside.

Let's summarize the true value of these military benefits for early-career service members this way:

• A first-term enlisted service member will enjoy benefits worth at least $23,535 a year in the form of free housing, utilities, food, and health care. 
• An officer in their first four-year contract will enjoy at least $38,935 a year in benefits beyond their $45,916-69,396 Base Pay (hint: earning 6 figures in your 20s is doing pretty darn good!).

These benefits mean you can save more and invest more, setting you up for financial success. The most important thing you can do at this point is to control your money, or in other words have a budget.

Budgeting Rules and Basics

There are a lot of budgets and plans out there, but the most popular one for getting started is called the 50:30:20 Rule. It says that after taxes, you spend 50% of your income on living expenses, 30% on whatever else you want, and you save 20%. That's not saving enough, however, as we explained in our very first Podcast episode (available to listen and download here).

You really need to save 40% of your pre-tax income, which happens to be about 50% of your after-tax income. That means that after you pay taxes, you would be on the 50:50 Rule: spend 50% for all expenses now, and save 50% for the future. That sounds really hard and like not a lot of fun -- until you take another look at the benefits available in the military.

The $15,100 in benefits an E-1, E-2, or E-3 receives covers living expenses. After taxes, their take-home pay is about $25,000, making their total paid+unpaid income $40,000. To get on the 50:50 Rule, they simply budget themselves $500 a month into a "fun fund," and save the rest. This will result in living on $20,000 a year, and saving $20,000 a year. If that money is invested in real estate, by the end of their enlistment they will have created up to $100,000 in wealth, and will be collecting $1,000+ a month in rent as extra income.

The young officer is also receiving 36-45% of their total compensation in the form of benefits; after taxes, O-1s will pocketing about $36,000 in Base Pay and $38,000 in BAH and other benefits. They should make a budget to live on Base Pay alone and save BAH -- or vice-versa. An O-2 should keep about $55,000 in Base Pay, plus the $38,000 in BAH and benefits. This O-2 can continue to use BAH (or their old O-1 take-home income) to pay for their living expenses; they can also split their increased salary and add about $750 a month to their "Fun Fund." This keeps them on the 50:50 Rule, gives them an extra $8,000 each year to spend on their lifestyle -- and has them saving $20,000-30,000 a year.

Balanced Savings

The most common savings advice in the military is to go all-in on retirement, "maxing-out" your Thrift Savings Plan (TSP). This would mean saving $23,000 a year to your TSP in 2024 -- to truly "max-out" retirement savings, you could save another $7,000 into an Individual Retirement Account (IRA). That strategy could net you $7.5 million by age 65 -- but this totally neglects enjoying life from 25 to 65. And if you had a major expense or emergency, you could be pushed into dangerous debt.

Instead, split your massive pile of extra cash that you can save each year into three categories:

1. Emergency Fund: Save enough to cover worst-case expenses without going into debt. Learn exactly how to do that reading here and listening here.
2. Retirement Savings: Contribute just enough to your Thrift Savings Plan (TSP) or other retirement accounts, but don’t go overboard. Your goal is to get to $2.5 million at a bare minimum. So long as you start at age 19-23 and save for 20 years, consistently every month, you only need to save $10,000-11,000 a year for those 20 years. With the Blended Retirement System's matching funds, that means you only need to save $6,900 of your own money each year, or about $575 a month.
3. Non-Retirement Investments: Everything else gets set aside as cash, or invested in stocks, bonds, or real estate. These investments can grow significantly, are accessible at any time without penalty, and provide you with wealth that you can access before retirement.

After 5-10 years -- or maybe closer to 15, depending on the assets you've invested in -- your investments will start paying you back significantly with rents, royalties, interest, and profit. In this timeframe, they will grow to more than make up for the part of your paycheck you save. In fact, in most cases within 10-15 years your investments will pay you more than your military Base Pay.

This is Financial Freedom.

You lived on half your paycheck for a decade, but now for the rest of your life you're going to live on at least double your salary. This additional income allows you to save more, which will accelerate your wealth and allow you to keep pushing upwards towards a 10 out of 10 lifestyle, which you may be able to reach in your 40s. By the time you're 60, your TSP kicks in and you will reach that Perfect 10 lifestyle.

The Here and Now

For the first 10 years when you are holding yourself back and saving aggressively, there is no need to damage your lifestyle. Take cars, for example. Americans love cars, and we dream of buying a specific car as soon as we have a job. So we go all-in, finance the car to buy it on our 22nd birthday, and grin ear-to-ear when the dealer hands us the keys. But are you smiling when you're handed a $610 a month payment on that debt? Of course not.

The key is to realize what you need right now is transportation. You can buy an $8,000 used car that will last you 5+ years and allow you to hit all your savings goals. You still have transportation, which means your LIFESTYLE HAS NOT CHANGED. Check that box, and wait a few years to buy the shiny car.

Transportation and housing are your two biggest expenses, typically over 50% of a 25-year-old's total expenses, which means this is the area where you can save the most money. So long as you have a "check the box" attitude instead of blowing out your budget, you'll save $1,500-2,500 a month in your 20s by avoiding auto loan payments and renting a room instead of an entire place. This will afford your savings goals, and you don't have to nickel-and-dime yourself on the fun stuff.

This means that instead of selling your paintball gear, denying yourself a new PS5 game, or staying home while your buddies golf or go skiing on the weekends, you have room in your budget to do it. You can still spend $100-200 a week on fun stuff, a nice restaurant meal, and a night out with friends and stay on budget, because you are saving big where it counts: housing and transportation.

Enjoying your life now is important for maintaining balance and avoiding burnout.

Make Saving Dope Again

Building wealth in the military without sacrificing your lifestyle is not only possible but also practical. By leveraging the unique benefits of military service and budgeting, every single person in the U.S. military has the ability to create $100,000 in wealth in their first 4-5 years in uniform. The plan is simple:

• Aim to save 50% of your total after-tax compensation; if you are in the barracks, add $1,200 a month to your total take-home pay, then divide by 2. Save that number.
• Minimize housing and transportation expenses. Aim for $0 per month in auto loan payments, and keep your total housing costs under $1,000 (including utilities). If you can get to $0, even better.
• Live on a budget.
• Give yourself an allowance each month for fun to avoid burnout. If you have a problem with spending and can't stop swiping your credit card, pay yourself your allowance in cash and leave the credit card at home every time you leave the barracks/house.
• Don't over-save for retirement. With BRS, you should be able to achieve all your retirement savings goals for about $575 a month saved to your TSP.
• Save everything else in your savings "bucket" into non-retirement assets, including real estate.

Doing these things creates a balanced approach to saving and investing, and to living and saving. This way, you can maintain your lifestyle, doing the things that make you happy on the daily basis, without throwing away your shot at Financial Freedom. Your non-retirement savings will ensure you can enjoy your wealth sooner rather than later. Your goal is to achieve Financial Freedom as soon as you can, possibly in your 40s, rather than giving up on it by leaving it to a distant dream for your 60s or 70s.

Remember, the sooner you start, the sooner you’ll be able to live the life you’ve always wanted. Knowing that you will be able to afford a Perfect 10 lifestyle and live the life you want in your 40s and 50s instead of continuing to grind away in a 9-to-5 is an amazing win in life. So take control of your finances today and make saving money cool again.