Financial literacy is a hallmark competency of leaders across the military. Personal finance mentorship can be a leadership tool for junior officers, assuming they possess appropriate financial competencies. However, naval officers can be found in ready-rooms, wardrooms, and officer clubs around the fleet comparing stories of financial dismay by not only their subordinates, but also their peers and superiors. Likewise, over-budget and behind-schedule is the reputation that has plagued military procurement. A deficit of financial competencies should come as no surprise, given the lack of financial education the Department of the Navy provides its officer corps. The U.S. Naval Academy is the only service academy to not offer a course of study in finance. This prompted a team of new company officers in the leadership, education, and development (LEAD) master’s program at the Academy to study midshipman financial literacy and compare findings to the fleet. This included the first survey of midshipman financial literacy in recent history, an outreach program to discuss financial literacy with midshipmen, and a comparison of financial training across service academies to identify best practices.
New Incentives for Financial Competencies
The incentive for a more financially-literate naval officer has grown significantly in the last six years. Above-target-inflation environments incentivize the active management of wealth preservation. Ergonomic securities trading platforms allow for suboptimal investors to easily access financial markets. Most importantly, the military’s new pension program has introduced new controls to service members, such that substantial knowledge of financial securities and portfolio management is required to optimize retirement savings.
Inflation-Driven Investment Incentive
For the better part of the last four decades, wealth was largely preserved in cash savings due to a low inflationary environment. However, the current above-target inflation environment highlights both the opportunity and necessity of investing cash savings to avoid devaluation. This is more significant for midshipmen than traditional college students for several reasons, most notable their access to low-interest career-starter loans. This, coupled with modern ergonomic trading platforms, suggests that the number of midshipmen investing in tradable securities has increased in recent years. This has been observed by professors and company officers, where midshipmen frequently use popular applications to trade equities and derivatives. Financial literature would classify midshipmen as suboptimal investors, who contribute to market arbitrage and allow for strategic investors to realize abnormal returns.
Changes in Retirement Planning
Extent literature correlates financial literacy with retirement planning, highlighting the importance of lifetime savings. In 2018, the Department of Defense replaced the High-36 defined benefit plan with the Blended Retirement System (BRS) combined defined benefit and defined compensation plan. The previous defined benefit plan required minimal interaction from the service member; however, the new system affords extensive interaction.
Management of service member contributions and fund selection is not something that can be setup in basic training and ignored. Benefits change after two years of service and portfolio allocation is at the discretion of the service member. Contributions may be placed in a lifecycle fund or a combination of five service member–managed funds. Contributions may be either tax deferred or not, and subject to combat zone tax exclusion. The maximum contribution in 2024 is $23,000 per year. The optimization of this portfolio is highly circumstantial, as service members prioritize the time value of money to their personal lives.
Service members’ nonretirement financial circumstances may incentivize them or require them to throttle contributions, such as between sea tours and shore tours. The $23,000 limit on contributions affords service members a large range of throttle positions. For example, a service member who purchases a vehicle or property must choose between a range of financing options and contributions, such as purchasing a car using a five-year loan and maintaining high contributions or reducing contributions and purchasing the car with cash. This example has an efficient allocation frontier; however, the due process necessary to arrive at optimal allocation is dependent on applying a framework of financial competencies.
Financial Education
The U.S. Department of the Treasury defines financial literacy as “the skills, knowledge and tools that equip people to make individual financial decisions and actions to attain their goals.” These skills, knowledge, and tools, better referred to as financial competencies, apply to corporations, governments, and individuals alike, and are best taught in a manner that maximizes perspective.
Personal finance education is limited in its diversity of financial instruments to those typically experienced by individuals, reducing the perspective of a larger financial decision-making framework. Corporate finance education often is easiest to explain with personal finance analogies, such as mapping out an individual’s assets, liabilities, and equity. This does not work both ways; a personal finance class is not inclined to use a corporate balance sheet as a training tool. However, the intent of both perspectives is to understand the financial decision-making framework, so any limit on application is undesirable. Once this framework is understood, it may be applied to a variety of personal, corporate, military, or government decisions.
Personal finance education can rapidly deteriorate to popular finance. Students often want final outcomes, rather than understanding underlying fundamentals that are used to derive outcomes. Likewise, untrained instructors often provide popular recommendations and uncertified instructors may be unaware of legal limitations of financial advice.
The Federal Government requires certification to charge fees for financial advice; however, no such regulation applies to academic settings. It is incumbent on academic institutions to adhere to teaching financial competencies and avoid deterioration to popular finance. This is acknowledged at other service academies with financial courses of study, in which finance professors maintain standardized curriculum content. The U.S. Naval Academy discontinued its personal finance course in 2012.
Midshipman Financial Literacy
The 2024 Survey of Midshipman Financial Literacy was the first of its kind in recent history. The primary objective was to establish a baseline of financial literacy among midshipmen that could be referenced in future studies. Research objectives were to gauge midshipman financial literacy and compare these findings to financial literacy among service members in the fleet. A 16-question survey that combined financial literacy measures from established research and the 2020 Status of Armed Forces Assessment (SOFA) was distributed to the Brigade of Midshipman.
The first objective was to gauge midshipman financial competencies according to methods established in pertinent academic literature. This included five core competencies of financial literacy, along with military-specific questions related to the blended retirement system. The findings (Figure 1) suggest midshipmen have strong understandings of money basics and savings and planning; however, midshipmen are lacking in understanding of budgeting, borrowing, financial products, and the blended retirement system.
The second objective was to compare these findings to financial competency levels of the fleet. Figure 2 reports composite scores of surveyed financial competencies by categorized ranks. Midshipmen and categoric ranks for the Navy and Marine Corps follow a logical pattern. Financial literacy amongst all enlisted ranks is low. Results indicate senior enlisted personnel have insufficient financial competencies to guide and mentor junior enlisted personnel through basic personal financial planning, placing this responsibility in the hands of junior officers. This should be a welcome leadership proxy for branch officers and platoon leaders, but only if they have sufficient financial competencies to lever. As discussed, management of the BRS has emerged as a new financial competency that will be at the forefront of financial leadership. However, less than half of midshipmen demonstrated a basic understanding of BRS.
Beyond the survey, a supplemental objective of the study was to qualitatively assess financial competencies and midshipmen perspectives. This included financial literacy presentations for company-level training that was followed by interactive discussion. In March and April 2024, six of the 30 Brigade of Midshipmen companies volunteered to participate in this training program. Midshipmen were observed to generally understand concepts associated with personal finance; however, they lacked understanding in personal accounting. For example, throughout financial lectures to approximately 90 midshipmen, it was discovered that not a single midshipman in the lectures who owned a personal vehicle had a car loan outstanding or used the career-starter loan to purchase the vehicle. Most midshipmen cited family support. This observation correlates to the surveyed deficit of knowledge in budgeting, borrowing, and financial products.
The 35.2 percent rate of response from midshipmen who participated in the voluntary survey is unprecedented for such a study. Promotional efforts by the authors can only account for a portion of this success. The high response rate suggests midshipmen are aware of their deficiencies in financial literacy and are eager to learn more.
Finance at the Service Academies
The U.S. Naval Academy stands alone amongst the four primary federal service academies as the only academy without an academic program of study in finance. Three departments across two schools of study offer finance-related electives, with all but Accounting (course name) offered intermittently. The consensus amongst professors and instructors who teach financial elective classes is personal finance becomes the unofficial course learning objective as basic financial competencies take precedence. For midshipmen who are unable to register for these courses, the only other source of financial training is through the midshipmen-led Finance and Investment Club. In 2024, the club had more than 1,000 members who participated in evening training sessions on financial topics including taxation, real estate, and wealth management.
West Point, Air Force, and the Coast Guard Academies all have robust finance and accounting courses of study and elective courses for non-majors, as reported in Figure 3. These courses generally are offered by the Department of Management, which mimics typical undergraduate business schools. This is most pronounced at the Coast Guard Academy, which offers a track for Certified Government Financial Management (CGFM).
Looking Forward
We find that midshipmen have strong understandings of money basics and savings and planning; however, lack understanding of budgeting, borrowing, financial products, and military-specific topics related to the blended retirement system. This aggregate level of financial literacy is proportional to the expectations of midshipmen relative to the fleet, yet insufficient to guide and mentor junior enlisted sailors and Marines in personal finance and the basics of the blended retirement system.
The authors attribute these findings to a unique lack of an organized financial curriculum at the U.S. Naval Academy. The presence of a major course of study in finance and accounting would promote the fundamental understanding of financial competencies within the Brigade of Midshipmen that otherwise go without standardization and are subject to popular interpretations. Enhancing the financial education of naval leaders is the first step to improving the financial wellbeing of service members throughout the Navy and Marine Corps.
