Optimizing Advance Pay during Military Transfer Season

Advance Pay is one of the awesome things about moving every 2-4 years in the military. The government will give you an interest-free advance on your pay with 12 months to pay it back! It’s a huge opportunity to take advantage of. In this post, we will talk about what to use Advance Pay for, how to optimize it for financial independence, and some things to be wary of, especially with the new BRS matching contributions to the TSP.

Advance Pay, taken prior to a government ordered move, is meant to ease the burden of a move. I’ll point you to your service’s policy to determine if you are eligible to take advanced pay. The general gist is the member is permitted 1-3 months of their monthly base pay to cover costs of a move in excess of the funds the government spends to move you and your family. Your service may impose limits on how many months you are eligible for. You may also have to seek your supervisor’s or Commander’s permission. The same goes for repayment periods greater than 12 months.

The general idea is that you use the money to assist with move related hardships: paying last & first month’s rent, etc. Specifically, advance pay is not supposed to provide for frivolous spending, big truck tires, or for investments…

Example

For the purposes of this post, let’s assume you can easily justify taking one month of advance pay and plan on repaying it in 12 months. Take a hypothetical sailor who earns $2,000 every month, plus a housing allowance, which covers 100% of his housing and utilities. He pays $300/month in taxes, $300/ month for a car loan, and invests only 5% of his base pay, $200. At the end of the month he has:

            2000-300= 1700 paycheck

              1700 – (300+200) = $1200

If our example sailor gets orders in March to depart his unit in June, he will see one month’s pay (minus his taxes etc) in May added to his paycheck.

                         2000 + 2000 – (300×2) = $3,400

                        3,400 – (300+200) = $2,900

That’s a huge increase in his spending ability!  In July, his take-home will be reduced by 1/12th of the advanced amount.

         2000/12 = $167

                        2000 – (300 + 300 + 200 + 167) = $1,033

While $167 isn’t a huge reduction in monthly spending ability, be sure to examine your predicted monthly expenses to ensure you can float this loan to yourself.

What to do with Advance Pay

First, Do Not fall for the false premise that advanced pay gives you a “pay raise” one year later when you start seeing more money in your paycheck. This self-lie will trick you out of properly planning for the use of the Advance Pay. You can’t fall for it if you are tracking your expenses properly. On the plus side, advanced pay is not a Payday Loan, which charges very high interest to “advance you” a paycheck.

Pay for moving expenses

The obvious first choice for Advance Pay is to cover moving expenses not paid for by the government. Maybe you have to ship a second Jeep to Hawaii or want to trailer a boat on the Alaska State Ferry. Maybe your landlord didn’t give back your security deposit. Hopefully, the advance will help you stay out of debt during this expensive time.

Pay off Loans/Debt

Taking advanced pay and taking a whole year to repay might be one of the most powerful debt reduction strategies for the military member. While the advanced pay policy seems to be written specifically for this scenario, take the time to examine your personal situation.

If I did not have moving expenses to cover but did have excess debt looming, I would reduce that debt with advance pay. Do the Debt Avalanche, but don’t fall for the mathematically fallacious Debt Snowball. If you have high-interest debts (over 5%), order them in terms of interest rate, and apply extra payments towards the highest interest debt first. Reducing the debt overhead will make your move much easier. Double bonus if you completely eliminate a loan or credit card payment!

Invest

While advanced pay isn’t supposed to go towards investments, money is fungible. Maybe you don’t invest the month’s pay that is advanced to you, but you invest in the months prior – extreme frontloading! I think the proscription against investing is not meant to preclude you from contributing to the TSP, but to ensure service members don’t go gambling in the stock market or falling for a Ponzi scheme. Getting a few thousand dollars into the market up to a year early is a pretty cool way to maximize the magic of compounding.

That being said, only take the pay and invest it if you can accept less pay each month. There is no sense going into debt later down the road just to get a small hit now. However, if you are generally cash flow positive, use the above strategies to maximize the advance.

Advance Pay and the BRS

Like in all defined contribution plans, those who Opt-in to the Blended Retirement system will only receive the 5% contribution match in months they actually contribute 5% of their pay to their TSP (401k). (While I am unsure, it is likely that no percentage of the advanced pay will be applied to the TSP, regardless of your settings, but ask to make sure with your service rep). Make sure you do not miss a month contributing, either by maxing out the TSP early using advance pay or by failing to budget for the lower paychecks each month and having to skimp on investments to stay afloat.

Failing to budget is budgeting to fail

If the 5% TSP contribution is at the bottom of your budget, beware how repayment of the advanced pay may impact your ability to contribute. You may miss out on the 5% match (free money) if you are paying back the loan rather than contributing to the TSP. Even though you receive the same amount of pay at the end by the year, you may miss out on that free money.

Frontloading Foibles

The same goes for front loading the TSP. Frontloading (the practice of investing in a lump sum as early as possible rather than making the same investment in equal monthly contributions in order to try and capture more of the market’s yearly earnings) can negatively impact your BRS match if done thoughtlessly.

It takes $1,500/month to max the (non-combat/non-catch up) TSP under current 2017 rules. The BRS will provide a match of 5% for each month you also contribute 5% of your base pay. Front-loaders making a big contribution around transfer season using advance pay might find themselves hitting the $18,000 max prior to December. In that case, for each month they DO NOT contribute 5%, they WILL NOT receive a 5% match. There is no retroactive match or prize for hitting $18K early, so be sure to carefully plan to contribute at least the minimum each month.

Always Catch the Match!

Being wary of the match also applies during years you get promoted and during years when you receive special, bonus, or incentive pays you don’t normally receive (if you are like me, 100% of these pay types goes to the TSP). The same goes for your spouse’s 401k or 403b if they receive a company match. My advice is to frontload as much as possible, make sure to plan for the minimum 5% a month and leave a few hundred dollars slack which you will take up in November and December as it becomes clear you won’t go over $18K.

Advance Pay Investing Example

For example, a Marine comfortably pulling down $4,000+ a month in 2018 and transferring could follow a plan like this to frontload and max her TSP in conjunction with advance pay:

4000*.05= $200

Contribution Total TSP (18k Max)
January 2,500 2,500 Frontload ‘till it hurts!
February 1,500 4,000
March 1,500 5,500
April 2,000 7,500 Ramp up in expectation of ADV Pay
May 2,500 10,000
June 2,500 12,500 Takes Advance Pay
July 2,000 14,500
August 1,500 16,000
September 250 16,250 >5% Capture the match!
October 250 16,500 Leave space for “accidental” contributions (Family Sep Pay, reenlist bonus etc)
November 500 17,000 …looking good
December 1,000 18,000 Max!

 

Did  I miss any ways to optimize Advance Pay? Let me know in the comments.

 

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