Veteran Understanding of Debt and Financial Stability, 3 Simple Rules
DEBT and YOUR FAMILY
The word ‘debt’ can send chills down your spine and make you want to run for the hills; but for most military families it can also mean the end of a military career. For Veterans it can mean homelessness. Unless you are debt free and independently wealthy, it means something to all of us—especially those of us who seem to be drowning in it. To own homes or vehicles it is far easier to go into debt than simply saving for years; but with an effective budget and some planning, everyone can avoid heavy debt. To completely understand debt, you must consider that you will owe the entire amount you have financed plus the interest that continues to accumulate until the last payment. That is a commitment you must be willing to make prior to taking out a loan for something you want or need. There are many ways to avoid debt—or at least manage it more successfully.
Common types of debt include credit card debt, personal loans, auto, housing or mortgage loans. Uncommon types of debt are payday loans, check cashing or payday advances, and renting to own. The reasons for going into debt are obviously simple: you want or need to make a purchase but do not have the funds needed to do it at that point in time. Instead of saving up money until you have enough, you can borrow the money now and repay percentages of it each month until totally repaid. That is the problem with debt today: our entire country and its people are buying stuff with money they have not yet made.
Too many individuals make unwise decisions without weighing the options and ensuring that going into debt is the right option. For example, taking out a high interest payday loan to buy a refrigerator (when your old one works just fine) now because you do not want to wait a month simply does not make sense. However, researching auto lenders and their rates prior to buying a new car does. Building a pros vs. cons table will often slow the process of a purchase and substantiate reasoning for going into debt and deciding if it is worth it or not.
An astounding 52% of servicemembers who lose security clearance is a result of financial difficulty shown on a credit report. Do not take on extra debt if you cannot afford it, and always make your monthly minimum payments to avoid fees or additional charges. When possible, try to pay more than the monthly minimum and pay off items earlier than expected. Interest is slashed by making extra payments to principle. This rule is especially true with credit cards and high interest loans. If you are currently in debt, consider consolidation or debt management from a trusted source.
BUDGETING: CONTROLLING FINANCES
“You must gain control of your money or the lack of it will control you”. No matter how much you earn, you must know how to save and manage your money if you are going to have any kind of financial stability. Often military and Veteran families are used to automatic deposits from the government and this can cause a false sense of security. Once we separate, transitioning into the civilian job market can be a daunting task and difficult to find a stable income. For many, budgeting was never taught at home. Sometimes we learn the hard way and it’s incredibly tough to find our way back. Learning to budget is necessary and it is not a big deal if you understand a few basic principles. You will be surprised at what it can do for you and your family once simple rules are applied.
Starting a budget is a great thing. Successful people have budgets and they track where every dollar is going. The word budget is not necessarily a bad word if done with an open mind. It is a necessary step to get where you want to go. A budget includes two main categories: income and expenses.
Here are some examples of income:
• Fixed income– your basic pay or salary
• Variable income– commission you may earn or 1099 income
Some examples of expenses you may have are:
• Fixed expenses– your mortgage, car payment, child support or phone bill
• Variable expenses– groceries, eating out, gasoline, entertainment
- All Americans, even servicemembers, must pay their income taxes. If you are serving in a combat zone or hazardous duty region however, your income taxes are not due by April 15. If this is you, then you qualify for an automatic extension of 180 days to file and pay your taxes.
- Military pay earned while you are in a designated combat region is not subject to income taxes for enlisted personnel and warrant officers. For commissioned officers, pay is tax free up to the maximum enlisted pay plus Hostile Fire or Imminent Danger pay. No action is necessary on your part to get the benefits. Federal Income tax withholdings are automatically stopped.
- Tax free income may be used to determine if you are eligible for the Earned Income Tax Credit or EITC. The credit may be used to offset your tax payments. In order to see if you may qualify for this credit you can visit www.irs.gov.
There are many free budgeting worksheets online. Your bank, for example, might have a template. If nothing else, just grab a blank sheet of paper and divide it into two sections. On one side list your total income for a month. On the other side of the paper list all your expenses. There will be variable month to month amounts with certain expenses, so you can make estimates for these and average them out. Continue adding other expenses, costs, and anything else that you regularly spend money on. When both sides are completed, total up both sides. The object is to be financially sound, so your income would be greater than expenses. If this is not the case, start looking at your expenditures and see where you can cut costs.
Training yourself to avoid spending unnecessary money is not an easy task of budgeting. That is not to say that you should never go out to dinner or see a movie; but consider cutting back when it is too much. The whole idea and goal are to get to a point where you have more money coming in than going out, and then you start saving. There are various ways to save but a great start is a savings account. Put in an amount you are comfortable with. In the beginning there will be a whole host of “what ifs.” After awhile the amount will become habit and you will see your account grow.
BUILDING A FOUNDATION
What savings alternatives are available?
As a saver, it is important to have a portion of your holdings in savings. There are several savings alternatives that will help you accumulate adequate savings and earn a reasonable rate of return.
Certificates of Deposit
Certificates of deposit are just short-term loans to a bank, credit union, or savings and loan. They offer a moderate rate of return and more safety because they are insured up to $250,000 by the FDIC.*
Series EE Savings Bonds
When bonds are mentioned, many people think of U.S. savings bonds or War Bonds. Series EE savings bonds are sold in par values that range from $50 to $10,000 if purchased in paper form; or from $50 to $5,000 if purchased electronically. Tax on the interest is deferred until maturity and may be eliminated if the proceeds are used to pay for a college education.
Money Market Funds
In a money market fund, your investment is pooled with those of other investors. The resulting fund is invested in a diverse portfolio of short-term debt securities. Money market funds offer a high level of safety and moderate income.
HAVE WRITTEN GOALS (AND EMERGENCY CASH RESERVE)
For many people, it is essential to keep a portion of their assets in liquid form to meet monthly commitments. Most families have their mortgage or rent payment, grocery, utility, and transportation bills coming out of their monthly paychecks. There are a host of other expenses that come up month to month that can put a strain on the family cash flow, but there are alternative ways get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding these alternatives and how they can satisfy your needs and adapt to your circumstance. A good recommendation is setting aside 6 months of emergency funds. This does seem impossible for some, but you need to start. The object is when you start a budget you write it down so you can physically see where and when your money is going. There is nothing wrong with writing down goals of where you’d like to be and what you would like to possess.
These goals can push and make you strive for your own betterment. Although pride can get in the way of some and talking about money with someone can be embarrassing or just seem foolish; finding a financial advisor could be advantageous and keep you on the path you’ve designed for yourself.
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