How to commit to saving tomorrow, today - a military perspective
Introduction
With the right strategy and mindset, serving in the Armed Forces offers a number of opportunities to save money. When I first heard of the "Save More Tomorrow" programme, my first thought was - how can people in the military make this work for them?
The programme has been running since 2006, but I first came across it 18 months ago when I read Money: Master the Game by Tony Robbins (https://www.tonyrobbins.com/tony-robbins-books/). It's an excellent book and discusses some interesting savings, investment and financial freedom goals (but is focussed on the options available in the USA). In the book, he makes reference to "Save More Tomorrow", a concept devised by economist Shalom Benartzi and Nobel prize winner Richard Thaler - after a quick YouTube search, I found the Ted Talk on the topic. It's linked below:
https://youtu.be/gzcw_02ZB1o
In summary, the Save More Tomorrow programme has people commit now to save in the future, links saving increases to pay rises and once enrolled, people have to opt out. This aims to address the psychological and behavioural challenges associated with saving money. Over 15 million Americans are signed up to the programme (http://www.shlomobenartzi.com/save-more-tomorrow).
Unfortunately, in the UK Armed Forces we don't have this programme as an option, but we do have a number of opportunities where we can make personal commitments to saving more money. We'll look at Longer Separation Allowance (LSA), Operational Allowance (OA), increment level increases and promotion.
LSA
If you have an upcoming period where you're going to be paid LSA, consider how much of it you want to save and set up a standing order with your bank to pay it into your savings account or transfer as you receive it (or however else you manage your money). Remember, you will have to pay tax and National Insurance (NI) contributions on this, so there is a bit of maths required to calculate how much extra money this will actually give you. Using the example of someone on rate 2:
To calculate this for your own circumstances, use the equation below (if you earn over £4,189 per month, only deduct 2% for NI for anything over this amount):
The LSA calculations above can of course be applied to an operation deployment, but the addition of the OA presents an excellent opportunity to save a lump sum. A typical 6-month deployment on an OA earning tour will pay you around £5400. The great news is that this is tax free, so we don't need to make any deductions - you could therefore commit to saving up to £5400 once you return from a 6-month deployment. Alongside 6-months of LSA (using the figures in the example above), that's potentially £6,900 of savings on return from tour (it's actually more as you will have went up a level of LSA during a deployment, unless you only had 80 days at the start of the deployment).
Increment level increases
On the completion of each year in rank you will go up an increment level and receive a pay rise (less the step from level 1 to level 2, in most cases). Again, this gives another opportunity to save this additional money. Let's take the example of an OR-2, trade supplement one, on increment level 3, who is about to move up to increment level 4:
Promotion
The pay jumps on promotion tend to be more significant than increment level pay jumps, particularly if you promote at the first or second opportunity. For this example, we will look at an OR-3 on trade supplement one who is promoting to OR-4 after 2 years as an OR-3:
Bringing it all together
In order to show how powerful this mindset can be, it is worth considering how it can be applied over a ten-year career. Let's track a ten-year period for an OR on trade supplement one and assume the following:
They progress as follows:
With this approach, this individual will have saved:
Summary
When you know you are going to see additional money added onto your salary, be it permanent or temporary, committing to saving that money, or a percentage of it, can be a really powerful strategy to achieve your savings goals. If your goal is financial independence (the topic of my previous blog post) having a robust plan and having the discipline to stick to it is essential.
With the right strategy and mindset, serving in the Armed Forces offers a number of opportunities to save money. When I first heard of the "Save More Tomorrow" programme, my first thought was - how can people in the military make this work for them?
The programme has been running since 2006, but I first came across it 18 months ago when I read Money: Master the Game by Tony Robbins (https://www.tonyrobbins.com/tony-robbins-books/). It's an excellent book and discusses some interesting savings, investment and financial freedom goals (but is focussed on the options available in the USA). In the book, he makes reference to "Save More Tomorrow", a concept devised by economist Shalom Benartzi and Nobel prize winner Richard Thaler - after a quick YouTube search, I found the Ted Talk on the topic. It's linked below:
https://youtu.be/gzcw_02ZB1o
In summary, the Save More Tomorrow programme has people commit now to save in the future, links saving increases to pay rises and once enrolled, people have to opt out. This aims to address the psychological and behavioural challenges associated with saving money. Over 15 million Americans are signed up to the programme (http://www.shlomobenartzi.com/save-more-tomorrow).
Unfortunately, in the UK Armed Forces we don't have this programme as an option, but we do have a number of opportunities where we can make personal commitments to saving more money. We'll look at Longer Separation Allowance (LSA), Operational Allowance (OA), increment level increases and promotion.
LSA
If you have an upcoming period where you're going to be paid LSA, consider how much of it you want to save and set up a standing order with your bank to pay it into your savings account or transfer as you receive it (or however else you manage your money). Remember, you will have to pay tax and National Insurance (NI) contributions on this, so there is a bit of maths required to calculate how much extra money this will actually give you. Using the example of someone on rate 2:
- Rate 2 LSA: £12.33 per day.
- LSA earning days: 60.
- LSA earned = £12.33 x 60 = £739.80.
- Tax deducted (assume a basic-rate taxpayer) = £739.80 x 20% = £147.96.
- NI deducted per month = £739.80 x 12% = £88.78.
- Total LSA after tax = £739.80 - £147.96 - £88.78 = £503.06.
To calculate this for your own circumstances, use the equation below (if you earn over £4,189 per month, only deduct 2% for NI for anything over this amount):
- Total LSA earned = (LSA rate x LSA earning days) x (100% - tax rate - NI rate)
- Total LSA earned = (£12.33 x 60) x (100% - 20% - 12%) = £739.80 x 68% = £503.06.
The LSA calculations above can of course be applied to an operation deployment, but the addition of the OA presents an excellent opportunity to save a lump sum. A typical 6-month deployment on an OA earning tour will pay you around £5400. The great news is that this is tax free, so we don't need to make any deductions - you could therefore commit to saving up to £5400 once you return from a 6-month deployment. Alongside 6-months of LSA (using the figures in the example above), that's potentially £6,900 of savings on return from tour (it's actually more as you will have went up a level of LSA during a deployment, unless you only had 80 days at the start of the deployment).
Increment level increases
On the completion of each year in rank you will go up an increment level and receive a pay rise (less the step from level 1 to level 2, in most cases). Again, this gives another opportunity to save this additional money. Let's take the example of an OR-2, trade supplement one, on increment level 3, who is about to move up to increment level 4:
- Increment level 3 annual salary: £22,286.
- Increment level 4 annual salary: £23,749.
- Annual increase = £23,749 - £22,286 = £1,463.
- Tax = £1,463 x 20% = £292.60.
- NI = £1,463 x 12% = £175.56.
- Annual increase = £1,463 - £292.60 - £175.56 = £994.84.
- Monthly increase = £82.90.
- After 3 years = (£994.84 x 3) + (£835.72 x 2) + (£816.00) = £5,471.96
- After 4 years = (£994.84 x 4) + (835.72 x 3) + (£816.00 x 2) + (£839.12) = £8,957.64
Promotion
The pay jumps on promotion tend to be more significant than increment level pay jumps, particularly if you promote at the first or second opportunity. For this example, we will look at an OR-3 on trade supplement one who is promoting to OR-4 after 2 years as an OR-3:
- OR-3 increment level 2 annual salary = £29,665
- OR-4 increment level one annual salary = £33,065
- Annual increase = £33,065 - £29,665 = £3,400.
- Tax = £3,400 x 20% = £680.
- NI = £3,400 x 12% = £408.
- Annual increase = £3,400 - £680 - £408 = £2,312.
- Monthly increase = £192.66.
Bringing it all together
In order to show how powerful this mindset can be, it is worth considering how it can be applied over a ten-year career. Let's track a ten-year period for an OR on trade supplement one and assume the following:
They progress as follows:
- One year in initial training.
- 2 years as an OR-2.
- 2 years as an OR-3.
- 4 years as an OR-4.
- Completed one year as an OR-6 at then end of year 10.
- 3 OA earning tours of 180 days in length.
- Complete one 30 day exercise (LSA earning) per year.
With this approach, this individual will have saved:
- OA = 3 x £5,400 / 2 = £16,200 / 2 = £8,100.
- 840 LSA days (tax and NI deducted) / 2 = £3,771.84.
- Half of all increment level and promotion increases = £41,432.06.
Summary
When you know you are going to see additional money added onto your salary, be it permanent or temporary, committing to saving that money, or a percentage of it, can be a really powerful strategy to achieve your savings goals. If your goal is financial independence (the topic of my previous blog post) having a robust plan and having the discipline to stick to it is essential.