- Jean Chatzky



- Jean Chatzky
A Financial Guide for Military Service
Members and Families
Bestselling Author and Financial Editor of NBC Today
Brought to you by Citi
Citi Salutes is a company-wide initiative, led by Citi Community Development
with employees across the firm, to support servicemembers and their families
through career development opportunities, banking services, and partnerships
with leading veterans organizations.
In Partnership with
NBC News
With Contributions by
Blue Star Families
Corporate America Supports You
Military Spouse Corporate Career Network
Veterans Plus
Dedicated to all who serve and have served.
Title Page
1. Budgeting Boot Camp
Living Below Your Means
Tracking Your Expenses
How to Build a Working Budget
Saving for Tomorrow
What Happens When Your Budget Changes
Tools to Make It Easier
Establishing a Relationship with a Bank
2. Debt and Your Bottom Line
Good Debt vs. Bad Debt
A Word about Credit Cards
How Much Debt Is Too Much?
The Debt Diet
Credit Cards vs. Debit Cards vs. Prepaid Cards
Debit Cards
Credit Cards
Other Ways to Borrow: Predatory Lending
3. Establishing—and Maintaining—Good Credit
How Credit Scores Work
Why Credit Is Key
When You Can’t Pay
Credit Counseling: A Debt Management Plan
The Servicemembers Civil Relief Act
4. Homeownership
How Much House Can You Afford?
Get Pre-Approved for a Mortgage
Shopping Around for a Mortgage
Shopping Around
The VA Home Loans Program
Making the Final Call
Refinancing a Mortgage
If You Have a Troubled Mortgage
Home Equity Loans/Lines of Credit
Improvements That Add Value/Improvements That Don’t
5. Cars
Buy or Lease
6. Saving for the Short Term
The Savings Hierarchy: Emergencies First
The Savings Hierarchy: High Interest Rate Debt Second
Where to Put Your Savings
Emergency Relief Grants and Interest-Free Loans
7. Investing for Tomorrow
The Military Retirement System
The Thrift Savings Plan
Military Bonuses
8. Protecting Your Family
Naming Guardians
Living Wills
Durable Power of Attorney for Finances
Do You Need a Trust?
Life Insurance
Calculating Your Life Insurance Needs
Filling the Life Insurance Gap
Converting SGLI
Life Insurance for Your Family
Disability Insurance
Health Insurance
Long-Term Care Insurance
Survivors Benefits
9. Paying for College/Training
Military Tuition Assistance
Montgomery GI Bill and the Post-9/11 GI Bill
Tuition Assistance Benefits for Spouses and Dependents
Reserve Educational Assistance Program
Saving for College on Your Own
10. Transitions
Dealing with a Relocation
Choosing a New Financial Institution
State Tax Relief
Managing Finances During Deployment
Banking While Apart
Important Documents You Need Prior to Deployment
Requesting an Interest Rate Reduction
Maintaining Your Medical Coverage
Retooling Your Budget in the Face of Change
How to Manage Reentry into Civilian Life
11. Finances for Caregivers
The Added Responsibilities of Military Caregivers
Steps to Take to Get Your Finances in Order
Financial Help for Caregivers/Care Recipients
Military Caregiver Leave
About the Author
Also Available
Operating in a challenging environment is second nature to U.S. service
members. While the unique financial challenges facing many veterans back
home can be daunting, you have been trained with a unique skill set, which
values preparation and the accurate assessment of risks.
This book aims to aid and support you in applying your skills to taking
control of your financial life. From investing in education and affording a home
to choosing the right credit products and adequately saving for retirement, the
following chapters offer military-specific advice to achieving financial stability.
You have dedicated your lives to the service of others. Back home, you can
use the principles of your training to continue to serve yourself and your family,
laying the proper groundwork for financial success.
Chairman, Citigroup Inc.,
First Lieutenant, U.S.
Marine Corps, 1969–1971
Why write a book on money management specifically for military families? As I
started to research this project, a number of people asked me this question.
My answer: When it comes to their money, military families are different.
That’s not necessarily a good thing or a bad thing. It’s just a fact.
And military families are extremely conscious of that fact. According to the
most recent—2013—survey of Blue Star Families, financial issues rank at the
top of concerns about military life. (Indeed, when you factor in the issue of
spouse employment, they occupy the top three slots.) Some 35% listed
pay/benefits as their top military life concern; another 22% cited changes to
their retirement benefits. And when asked about what they were most
concerned about when separating from the military, loss of income and
employment possibilities topped the list. All in all, 65% of military families said
they had experienced stress when it came to their finances.
These concerns are understandable because military families face financial
challenges that civilian families don’t face. When they’re serving on active duty,
they’re typically asked to move every few years. This, of course, makes the
decision of when to buy vs. rent a home a tougher one to process. But it also
raises other issues: How do you come to terms with the fact that the cost of
living in your new location may be much higher than it was in your last? How
does your spouse find work in city after city without starting at the bottom of
the ladder each time?
Similarly, active duty military members must learn how to manage money
during deployments. For those who are single and on their own, this can be
complicated enough, as the ability to log onto US-based accounts can be
sporadic and troublesome. For couples and families it’s even tougher.
Managing the finances means figuring out a way to maintain a balanced
budget while communication is limited. (Although some couples have figured
out a way to use the deployment to save more, others have difficulty during
these times.) Meanwhile, the spouse at home is essentially functioning as a
single parent. That person needs, but often doesn’t have, the skills and tools to
make serving as the family’s Chief Financial Officer as easy as possible.
Compounding matters, the financial needs of the military community is not a
one-size-fits-all proposition. For example, Reservists and members of the
National Guard face different issues than active duty service members.
Veterans need another kind of financial information, as do retirees.
Much of this information has to do with making the most of the many
financial benefits the military provides. From the ins and outs of the Thrift
Savings Plan to the home mortgages provided by the Veterans Administration,
from the credit card (and other) breaks offered under the Servicemembers Civil
Relief Act to the Servicemembers Group Life Insurance plan, the military offers
a great deal in the way of a financial helping hand. Knowing how, and when,
you can access those programs and benefits is so complicated, however, that
many go untapped. (Moreover, according to the Blue Star Families survey, the
level of confidence that many important benefits—including those for education
and healthcare—will be available when they’re needed, is not high.)
When Holly Petraeus joined the Consumer Financial Protection Bureau to
lead the Office of Servicemember Affairs in 2010, she immediately started
traveling. In the years since, she has visited more than 70 military
installations, in addition to debriefing veterans and retirees, all with the
express purpose of finding out what the financial issues are. She’s also lived a
military life herself. “The military is a unique financial situation,” she told me.
There are pros to that uniqueness. Members of the military are more
resilient than the population at large. That shows in their finances, according
to data collected by the FINRA Investor Education Foundation for its 2012
Financial Capability Study. Military personnel are better at making ends meet—
they seem to have an easier time than civilians in spending less than they
make. They’re better at planning ahead for both the short and long term, in
that they’re more likely to have both emergency cushions and retirement
accounts. And, based on the results of a financial literacy quiz, they have
greater financial knowledge than the general population, perhaps due to the
fact that unlike many high schools and colleges around the country, the
military tries to offer at least some financial literacy education.
In other ways, though, the differences are troubling. Members of the military
have a worrisome track record when it comes to managing financial products,
particularly mortgages and other types of debt. Of course there are times in life
when taking on debt makes sense. Borrowing to buy a home, the car that gets
you back and forth to work or to finance an education helps you move ahead in
life. But research has shown that servicemembers—often due to the special
circumstances of their lives—are more likely to take on worrisome types of
debt. They’re more likely to carry credit card debts, to frequent payday lenders
and overdraw their checking accounts, and to be underwater on their
mortgages. Learning how to deal with (and overcome) those challenges is one
aim of this book.
Then there’s the issue of financial fragility. Financial fragility is a phrase
coined by a George Washington University professor (and financial literacy
champion) named Annamaria Lusardi. It basically means not being able to
come up with $2,000, if you need it within the next month, without resorting to
drastic measures like selling your belongings. It’s an American problem, not
specifically a military one; nearly half of American adults fall into the category
according to the National Bureau of Economic Research. When asked, only
20% of military personnel say they’re financially fragile; yet when prompted for
specifics only 53% are sure they could come up with the money.
This is just one example of a troubling behavior: It seems that military
personnel have difficulty admitting when they’re in a tough financial spot.
When asked how well they deal with their day-to-day finances, things like
checking accounts and credit cards, four out of five military folks say they’re
doing a good job. In real life, even among those who gave themselves the
highest marks, two out of five aren’t doing so well. They’re making minimum
payments on their credit cards, paying late and over-limit fees to their card
issuers, and taking out pricey cash advances.
The reluctance to admit you’re having financial problems is understandable.
Military personnel with documentable money problems—like high amounts of
debt—can lose their security clearances. A person in over his head is
considered a risk, because owing large sums to another person or organization
can lead to making questionable decisions, even to doing illegal things. But it’s
also more than that: It’s a matter of character. In the military, the inability to
handle your own money raises questions about what else you might be unable
to handle. Can you be trusted? Will you be reliable? How is your decisionmaking ability? This is why, even before official security clearance questions
arise, COs will often tell their underlings to clean up any financial mess.
All of this is very, very stressful. Even for civilians who don’t face similar
pressures, finances are no walk in the park. That’s not your fault. Half of you
never received any sort of financial education in school, college, or the
workplace. (And most of you who did, got it from the military.) But it goes a
long way to explaining why only one-third of military personnel are satisfied
with their personal finances.
That won’t do.
The aim of this e-book is threefold: Stop those problems before they
happen; give you the tools to manage through a tough situation if you’re
already facing one; and help you figure out how to plan for your future—either
in or out of the military—and then assist you in doing it. The chapters that
follow are focused on saving, debt, credit, buying and financing a home, buying
and financing a car, paying for college, protecting the ones you love with
insurance and an estate plan, dealing with a relocation, managing money
through a deployment, handling a furlough, retirement, divorce, and the
financial aspects of caregiving.
As you know, this book is a free resource. I hope you’ll share it with friends,
colleagues, and anyone else you think might need it.
Let’s begin.
Budgeting Boot Camp
Many people cringe when they hear the word budget. It has implications much
like another “dirty” word—diet.
Restriction. Limitation. Daily accounting. A loss of freedom.
In fact, I find that having a budget is exactly the opposite. Because once you
know you have enough money to cover your monthly expenses and save, it
frees you up to do whatever you want with the rest. That might mean taking
the vacation of your dreams, or amassing enough cash to put a substantial
down payment on a house, or sending your kids to the college of their choice.
You’ve likely heard the charge to live within your means before. That’s not
what we’re talking about here. The word within implies that you’re spending
every last dollar, living up to—and possibly stretching—the limits of your
income. I want you to live below your means. That means you have money left
over at the end of every month, money to save or, if you’ve reached your
savings goals, to spend as you wish. It means spending less than you make.
Unfortunately, many members of the military aren’t doing that right now.
Only half spend less than their income; 28% spend as much as they make and
19% spend more. Moreover, three out of five say they find it somewhat or very
difficult to cover expenses. One-quarter have overdrawn their checking account
in the past year.
The best way to fix this problem is to, as they say in detective novels, follow
the money. You can’t live below your means if you don’t know where your
money is going.
There are questions you have to answer before you start budgeting. What’s
going out each month to pay for household expenses and groceries, and your
mortgage, and new shoes for your kids? What are you spending on pizza
delivery, and movie tickets, and that bottle of wine or six-pack of beer at the
end of a long day? The best way to get these answers is by tracking your
spending—the spending you do on credit, via check, and importantly, in cash.
I’ve held on to an old issue of Good Housekeeping magazine for years
because of a single line on the cover. It says: “The Single Best Way to Lose
Weight (It’s Not What You Think).” The article inside isn’t about exercise. It’s
not about a new juice cleanse, or the Paleo Diet, or eating six small meals
instead of three large ones. It’s about keeping a food diary.
Researchers found that if you write down everything you eat, you actually
begin to realize how much you’re consuming. And then—because, perhaps for
the first time in years, you’re conscious of what you’re putting in your mouth—
you eat less. Tracking your spending works much the same way. If you write
down how much you spend each day, you become conscious of where your
money is going. You watch it add up. And you start to spend less.
So I want you to do exactly that for a month. How you do it is up to you. You
could use a notebook you carry around in your pocket or handbag. You could
use a budgeting app (we’ll talk more about tools like this later in the chapter).
The goal is to paint a complete picture of where your money is going. What are
you tracking? Everything. But I find the things that surprise people most fall
into the following three categories:
The big, occasional expenses. These aren’t daily occurrences but, instead,
your spouse’s birthday present, or back-to-school items for your kids, or
concert tickets for an upcoming show. Research shows we tend to spend
more on these so-called “special occasion” expenses because we allow our
brains to flag them as rare, even though they happen more often than we
think. This kind of spending can really dig a hole in your budget, so it’s
important to account for it.
The small expenses. The coffee you buy in the morning, the sandwich you
get for lunch, and the after-work beer. These may seem small in the scope
of a day—a $5 sandwich isn’t much—but over time, they add up fast.
Spending $5 a day on a sandwich becomes $152 per month. That’s more
than half of a car payment, it’s the cable bill (and then some), or a good
portion of your monthly grocery tab.
The virtual buys. Be sure to track the money you spend when no money
actually changes hands—when you visit the iTunes store, download a book
to your Kindle, buy stamps from the ATM, or have your health club
membership auto-debited from checking.
Why is tracking so important? Because of how quickly these expenses add
up. As you track, pause a minute to think about how much you value the item
you just purchased. What many people find is that they didn’t know how much
money was going down the drain on things they really didn’t care much about
—things like soda or lottery tickets or ATM fees. These things don’t keep the
lights on, or let you watch your favorite Sunday night television show, or put a
roof over your family’s head.
It is not my intention to be the money police. I’m not here to tell you what
you can and cannot spend money on. It’s your money and, therefore, these are
your decisions. What I am here to do is help teach you how to gather the
information you need to make informed decisions. Then you can choose where
to spend your money. And once you’ve seen how much your daily breakfast
sandwich is costing you per month, you may start scrambling eggs at home—or
you may decide that delicious combo of bacon, egg, and cheese (on a biscuit,
of course) is what gets you out of bed in the morning; you’d rather cut back
elsewhere. And that’s fine. The point is that money is a limited resource. You
might as well be using your allotment to purchase the things you either need
or truly value. That’s why it pays to know where your money is going.
Now it’s time to build your budget, and the good news is, you’re halfway there.
Many people struggle to create a budget because they can’t get a handle on
what their expenses actually are. Because you’re tracking, you know how
you’re spending discretionary money, which is the slipperiest part. You should
also have a record of your regular monthly expenses and bills, which is easier
to assess.
But there are two sides to the budgeting equation: what’s coming in (your
income) and what’s going out (your expenses). We’re going to start with your
income, which means taking a look at how much you’re bringing home each
month. This process is going to vary depending on whether you’re looking at a
military salary or a civilian salary.
Military Pay and Allowances
This can be tricky. You want to get a handle on all your various sources of pay
and benefits, of which there may be many. Let’s look at each:
Base pay. This is taxable, unless you’re deployed in a tax-exempt zone.
Basic Allowance for Housing (non-taxable). If you live off base, you’ll
receive an amount that should, in theory, cover rent, insurance and
utilities. The amount you receive will be predicated on your location, rank,
and family status. Find a home that costs below your BAH? You pocket the
difference. If it costs more, you pay the difference out of pocket. Keep in
mind that when stationed overseas, you’ll submit your rental agreement,
and your BAH will cover the exact amount of rent, plus utilities. (Note:
There is a cap on this. Don’t sign on the dotted line before you know what
the maximum is.) Your rental agreement must be approved, and how
much you can spend will be limited by the average rental costs in the area
and your rank. Finally, if you live on base, your military housing will be
covered and you won’t also receive a BAH.
Food allowance (non-taxable). If you live in the dormitories on base, you’ll
likely be required eat in the chow hall and the bulk of your food allowance
will be deducted to cover that cost.
Clothing allowance (non-taxable).
Family Separation allowance (non-taxable). Issued when you are
separated from your family on official duties for over 30 days.
Imminent Danger Pay (taxable)
Special Duty Pay (taxable, unless in a tax-exempt zone).
Enlistment and re-enlistment bonuses (taxable, unless your reenlistment
paperwork was signed in a tax-exempt zone).
Cost-of-Living Allowance (COLA). If you are living in a high-priced area in
the US, COLA is taxable. If you’re receiving it because you’re overseas, it is
Of course, all of these come in one lump payment. You’ll also get an
earnings statement twice a month that breaks down your pay and benefits.
You need to be cognizant of what you’re earning, and how it breaks down,
because many of these figures—particularly allowances like your BAH and
COLA—can fluctuate or disappear completely if you move to a new duty
For the purposes of budgeting, it’s best to work with take-home pay, which is
the amount that lands in your checking account each month. That means after
taxes are taken out (of taxable income), and after you’ve made contributions
to your Thrift Savings Plan for retirement.
Civilian Salary
If your spouse isn’t a member of the military, and works outside the home, or if
you’re no longer active, you’ll want to consider any income you receive a bit
differently. If that job produces a regular, steady paycheck, this should be a
fairly easy question to answer. You know how much lands in your checking
account each month via that paycheck, and this exercise is just a matter of
adding it up and understanding that, again, you must budget on the net—not
gross—salary. In other words, after deductions have been made for Social
Security, retirement savings, taxes, and any health insurance coverage that is
paid out of pocket.
But what if we’re talking about a fluctuating income? This may be the case if
you or your spouse has a part-time job, works an hourly schedule that varies
week to week, or is self-employed. All of these scenarios are common in the
military, when frequent moves and deployments make it difficult to keep fulltime employment. A fluctuating income makes coming up with a base income
from which to budget a little tougher. You need to come up with an average
amount of take-home pay so you don’t get ahead of yourself with spending. To
do so, add up the last 12 months of income. Subtract any taxes owed or other
deductions, then divide by 12. This is a safe number to use, unless last year
wasn’t typical, in which case, err on the side of caution and assume you’ll earn
a little less.
Finally, I spoke to scores of military families for this book, and many have
been financially successful for one big reason: They learned to live on the
military member’s salary and bank anything that came in from the non-military
spouse’s job. Why does this work? Because not only does it mean you’ll
consistently be saving, but it makes a move—during which your spouse may
suffer a long-term unemployment—a lot easier to swallow. You’ll already be
used to living on one income.
Once you have calculated your family’s total take-home pay (whether you’ve
decided to factor in both spouse’s earnings or budget solely on your military
income), you can start figuring out the expense side of the equation. Take it
item by item. I’ve pulled together a list so that you’re less likely to miss
something. If you have expenses I haven’t covered here, add them in.
Mortgage or rent
Second mortgage or home equity loan
Home ownership association or co-op dues
Home décor and maintenance
Property taxes
Homeowners insurance
Renters insurance
Water and sewer
Auto loan
Auto insurance
Public transportation/taxis
Parking and tolls
Student loans
Credit cards
Other debts (personal loans)
Dining out
Pet expenses
Clothes and grooming
Cell phones
Child support or alimony
Health and fitness
Charitable gifts
Life insurance
Health insurance
Long-term care insurance
Emergency savings
Retirement savings
College savings
Some of these line items won’t change month-to-month—you know what you
spend on the mortgage or rent, how much your cell phone bill is, what you owe
on your auto loan each month. Others, like the electric bill, are variable
expenses—moving targets that can swing a great deal, each month and often,
depending on the season. For those, like a fluctuating salary, you need to
determine an average to plug into your budget. To do that, go back over the
last year and take stock of what you paid, provided the last year reflected
“normal” spending and you lived in the same home. If you’ve moved, you can
contact the service provider for the various utilities and ask what the typical
monthly charge is likely to be. Often they will give you a quick history of what
the previous occupants paid.
When it comes to discretionary expenses—things like groceries, gas for your
car, dining out, and entertainment—as long as you’ve been tracking, you’re all
set. Take the information you’ve tracked and use it as a guide for what you
spend in those areas each month.
And note: If you haven’t tracked until now and intend to, just dive in. You
don’t have to wait until the start of the next month to get a snapshot of what a
month’s spending is likely to look like. If you haven’t tracked and don’t intend
to, I have a couple of workarounds. They aren’t as good as really knowing
where all your money is going, but they’re fairly decent second choices.
The first: Pick one credit card (if you’re the sort that pays every monthly bill
in full and never carries a balance) or debit card (if you’re not) and use it for
everything. Have your spouse do the same. (Many of you may be doing some
form of this already; research shows debit cards are the most frequent means
of payment for members of the military, followed by online payments from a
bank account, credit cards and, a distant fourth, cash. The trick is to use one as
exclusively as possible.) Your monthly bill then becomes a fairly good proxy for
a spending tracker, as long as you avoid cash as much as possible and are sure
to add on what you take out of the ATM.
The second: Adopt a non-budget budget. Below, I lay out my guidelines for
how much I want you to be saving. Save the suggested amounts first by
moving money out of checking and into your savings or retirement accounts. If
you can do that and still spend less than you’re earning, you’re living below
your means and that means you’re doing pretty well.
One of the questions I’m asked all the time is: How much? How much of my
take-home pay should I be saving, as well as spending on various living
categories? I call this my budget pie chart, and I like to see it break down like
Housing: 35% of take-home. Housing is not just your mortgage payment
or rent, but your maintenance, taxes, and insurance.
One special note here: When you move to a new duty location, or PCS
(Permanent Change of Station), some of your sources of income are likely
to change. Your BAH is the big one. If you’re used to receiving a couple
thousand dollars, then suddenly that amount drops by half because you’ve
moved to an area with a lower cost of living, that’s going to be an
adjustment—even if you can find a place to live for much less. So my
suggestion is to keep your housing costs within that 35%, but also always
keep them within your BAH—and try to not use that money for other
expenses that will come with you, like an extra car payment. That will
make a move—and possible reduction of your BAH—a much smaller
Transportation: 15% of take-home. Again, this is not just your car
payment, but your gas, public transportation, maintenance, and parking.
Other Debt: 15%. Debt above and beyond your mortgage and car loan,
this includes student loans, credit card interest, and personal loans.
Living Expenses: 25%. This is everything else. Groceries, eating out,
healthcare, gifts, clothing, vacations, you name it.
Savings: 10%. The only nonnegotiable category. Any category can be
borrowed from to feed any other, except for savings. Savings is
If you’ve tallied your expenses and you are way off the mark, you need to
look at where they are out of whack: Are you spending above and beyond your
BAH on rent? Is the price of gas pushing your transportation costs over the
top? Or is your weakness in the living expenses category? If so, dig a little
deeper there to see where the numbers are bigger than anticipated—because
you tracked your spending, you’ll easily be able to see that you’re blowing too
much cash on take-out or taxis.
To trim the areas that have gotten off the rails, look at what you’re currently
spending and then pick a spending target that seems reasonable. So, say last
month you spent $527 on groceries. You might see that you could wiggle down
to within budget if you cut that number to $350, still a reasonable figure.
That’s your new grocery budget. Go through each item and make cuts until
your overall budget is in line.
As you probably noted, I count savings as an expense. In my mind,
contributions to savings are nonnegotiable, just like paying your electric bill.
That 10% figure may be daunting. You may feel like you’ll never get there—
maybe you’re barely scraping by stashing away 1% or 2%. But the idea is to
work your way there slowly, and budgeting is a great start. Other ways to
boost your stash:
Automate it. It’s hard to make the decision to save every month, which is
why I like to advise people to make automatic savings transfers—money
will be moved without you even thinking about it, and eventually, without
you noticing it’s gone.
Start small. That 1% or 2% is fine for now, but note on your calendar that
you’ll increase it by 1% in six months. Six months later, boost it by
another 1%.
Save more with every raise and bonus.
Supercharge during deployment. When deployed to a tax-exempt location,
you can deposit up to $10,000 through the Savings Deposit Program, and
that money will earn 10% interest, which is practically unthinkable in this
interest-rate environment (and pretty great overall). You’re also earning
tax-free money if you’re deployed in a tax-free combat zone.
Our economy—in particular the job market—has been nothing close to steady
the past few years. Military families feel that roller-coaster ride more than
most. Nearly 30% say they have experienced an unexpected drop in income in
the past year—a number that is highest among entry-level enlisted personnel
and tapers off (but doesn’t vanish) among officers. That can be the result of a
change in station from a higher-paid part of the country to a lower-paid one—
and thus that sudden change in BAH (and possibly COLA) we talked about
earlier. It can happen when a transfer results in a spouse being unable to find
a job with the same pay as in the prior town—or unable to find a job at all. Or
it can simply be the result of a layoff, the sort that eight out of 10 Americans
say someone in their inner circle of family and friends has experienced
Every one of these income-lowering events, and many others on the expense
side of the equation (a parent needs financial help, a child needs tutors or goes
to private school, a house you’re no longer living in sits stubbornly on the
market), can throw even a well-oiled budget for a loop. What do you do?
Act quickly. As soon as you are notified that your income is going to take a
hit, sit down and regroup. Go back to your original list of expenses and
figure out where you can make cuts so that you will continue to live below
your means. If you’re PCSing, and faced with a lower BAH (or reduced
COLA), this can happen naturally—your housing costs are likely to take a
dip. But evaluate each line item separately: Do you need all the mobile
minutes you’re paying for? Could you cut cable channels? What if you ate
out one less night each week? Is your credit score high enough to warrant
an interest rate reduction on your credit cards (more on this in the next
Look for ways to supplement. As I noted earlier, there are two sides to this
equation. Once you trim your expenses, look to boost your income: Could
you or your spouse moonlight or freelance? Are there things in your attic
that might sell for a decent price online?
Wave the white flag. If it gets to the point where you think you’ll have
difficulty paying your bills, call your creditors. We’ll discuss this more in the
next chapter as well, but they may be able to provide short-term relief
while you figure out your next move. Still, no help will come your way
unless you ask for it.
You can, as I noted, budget with pencil and paper. But these days, there are
tools to make it easier:
Excel: It’s probably already on your home computer, which makes it a
convenient choice. It has a household budget template that can easily be
tweaked to your family’s needs.
Quicken: The program’s low-level budgeting software is currently $39.99
and will help you project income and expenses, create a budget, and
categorize your spending. It works with your bank, so transactions done by
debit or credit are automatically recorded, and you can take pictures of
receipts to record cash transactions.
BudgetSimple: This is a free online tool that tracks your income and
entered expenses. A premium version ($3.99/month) includes a mobile
app and allows you to link bank accounts, so the site can automatically
pull spending data.
Mint.com: Mint is owned by Quicken, and it’s a well-oiled machine: The
service automatically pulls all of your financial information from banks and
credit card companies, so you can categorize spending and see where your
money is going. It then categorizes your purchases, though in my
experience, you’ll need to do some tweaking until it learns your behavior.
You can also add investment accounts to track balances and contributions.
And there’s an included mobile app and bill reminder feature.
You Need A Budget: This program is presently $60, and it installs on
your computer. Unlike the others, YNAB doesn’t talk to your bank or credit
card to get transactions—you’ll need to enter them manually, or the
service will import a transaction log, like your statement. The upside to
this more manual approach, however, is that it forces you to look at your
spending. The program’s mobile app allows you to enter transactions while
you’re at the register, and spending will update on your home computer.
Most of the budgeting tools I referenced above talk directly to your bank to get
spending and deposit data. The vast majority of the military population—97%
—has a banking or credit union relationship in the form of a checking account,
a savings account, or some combination of the two. That’s important for a few
You’ll be able to easily cash checks or receive direct deposits, without
You’ll be able to pay bills online, which we’ll talk more about in the next
Using a debit card (linked to your bank account) makes it much easier to
track your spending. The bank does the dirty work for you; all you have to
do is categorize.
Establishing a designated savings account is key to actually building
savings—if you just stash cash under the mattress, you’re more likely to
pull from your stash for an impromptu dinner out, and you won’t earn any
interest (yes, I know that interest rates on plain, vanilla savings and
money market accounts are abysmal these days, but something is better
than nothing—and your money is FDIC insured).
In many cases, you need an established bank account to be approved for a
mortgage, auto loan, and even some credit cards.
Find Your Bank
There are a variety of banking options available to you—you can go online
only, with no local brick-and-mortar outpost. You can choose a small, local
institution. You can go with one of the big guys. Or you can look at credit
unions, which are member-owned financial cooperatives that function much
like banks. Often credit unions have membership requirements—they may only
accept members who work in a certain field or for a certain company, or who
live in a certain area. But in general, most customers will be able to find a local
credit union that will accept them, and there are many credit unions for
members of the military.
Banking Online
When choosing a bank, you want to look for one that offers free online banking
—these days, many do. Online banking will save you time and money, and
keep your organized. If you’re married or in a relationship where you’ve comingled money, it will help you manage through deployments because both of
you will be able to access your accounts in real time. And it’s easy: It will take
you about an hour or so to set up your accounts and get used to your bank’s
interface, but once you’ve done so, you’re good to go.
The beauty of online banking is that you can schedule certain bills to be paid
automatically each month. Things that cost you the same amount month in
and month out, like your mortgage and your auto loan, are perfectly suited to
this feature. It impossible to forget to pay, and you’ll always pay on time,
avoiding late fees and damage to your credit score.
For bills in your budget that are variable, like the electric bill and other
utilities, you can type in the amount each month and ask the bank to send off
a check or move the money for you via a wireless ACH (Automated Clearing
House) transfer. In both scenarios, you’ve eliminated the need to go to the
post office, stamp envelopes, fill out and clip the payment forms, and you’ve
created an electronic record that the bill was paid.
The last reason to bank online—and it’s a biggie—is that people who bank
online are less likely to be victimized by identity theft and credit fraud than
people who bank the old fashioned way. Why? Research shows that people
who bank online look at their accounts about four times more often than
people who bank and pay bills by hand. That makes spotting fraudulent
purchases and unauthorized charges much more likely. You’ll also know which
payments are outstanding, which deposits have cleared, and where you stand
financially in real time. If you share a joint account with your spouse or
partner, you don’t have to keep each other up to date on every little debit. And
these days, you can even deposit checks by taking a picture with your smart
Finally, a word about online savings accounts: As you may have noticed in
the flow chart, online banks often pay a greater interest rate because they
don’t have the overhead that brick-and-mortar outlets do. That said, there are
pluses and minuses to banks that don’t have a local presence. It may take a
couple of days to transfer money out of your Internet bank to a local one if you
want to withdraw it. If your money is needed in an emergency, this can be
truly inconvenient. If the funds are earmarked for long-term savings, however,
the fact that you have to take an extra step to access it may increase the
likelihood that it stays put. You may want to split the difference and keep
some cash on hand in a savings account at a local bank, and the rest online
where it can earn more interest and you can resist reaching for it in moments
of spending weakness.
Debt and Your Bottom Line
Debt is, quite simply, a fact of twenty-first-century life. Without borrowing, the
vast majority of us couldn’t afford homes, cars, college educations, and the list
goes on. But borrowing because it helps improve your financial life is different
than borrowing because you can’t live without it.
Although the debt crisis in America has improved over the past few years—
the number of homes foreclosed upon and cars repossessed has fallen, as has
the average amount of credit card debt we’re carrying—it is still a big problem
for military families.
Half of all service members believe they have too much debt right now—a
feeling that rises with age (people with financially dependent children are
much more likely to feel this way than people without). The implications for
the rest of your financial life are daunting. People who feel they have too much
debt are much less likely to be satisfied with their financial lives overall.
Carrying too much debt can also hamper a military career. It is thought to be
an indication of how trustworthy you are (or aren’t), whether you have sound
judgment (or not)—in other words if you’re a responsible individual. There are
times when someone excessive issues with debt or poor credit (which we’ll
discuss in the next chapter) won’t be allowed to enter into military service.
Carrying too much debt can also stop you from getting the security clearance
you need.
The biggest factors that lead people to feel as if they have too much debt
are credit card debt (according to Debt.org, 25% of military personnel owe
$10,000 or more on their credit cards compared with 11% of civilians), auto
loans, and non-bank borrowing. We’ll deal with auto loans in Chapter 4 and the
others in a bit. Homeowners, as long as they’re not underwater, don’t share
the sentiment.
Of course, members of the military also enjoy a few special perks where
lending is concerned. There’s the VA Home Loans program from the US
Department of Veterans Affairs that offers service members, veterans, and
some surviving spouses help in purchasing housing. Likewise, there are military
credit cards from financial institutions, like USAA, that carry lower interest rates
and other perks. And you may enjoy special interest rate reductions on debt
you were carrying before you entered the military.
We’ll get into all of those in more detail. But I mention them here to point
out that while they are nice options, they do not make you exempt from
needing a good credit score and a manageable debt load. The key to both
begins with knowing the difference between good debt and bad debt.
Good debt is debt that gets you somewhere. It’s the house that puts a roof
over your head and the mortgage that, when paid off, can act as a
supplemental savings account for retirement. It’s the car that gets you back
and forth to work that, when paid off, can continue to get you from here to
there for many years to come. It’s the college education that improves your
lifetime earnings power by about $1 million. Bad debt is debt you incur for
things you don’t necessarily need, perhaps don’t even really want, and almost
certainly can’t afford.
Another way to tell the difference between the two? Look at the interest
rate. Interest rates on good debt—mortgages, car loans, student loans—are
generally lower than they are on bad: high-rate credit cards, pawnshops,
payday loans. In the recent past, they’ve been in the low-to-middle single
digits; rates on bad debt have been three or four times that much. Mortgages
and student loans are also frequently tax deductible.
Of course, there are times when the line between good and bad is more gray
than black and white. What if your refrigerator dies and must be replaced? In
the best of all possible worlds, you’d have an emergency cash cushion to pay
for that, but what if you don’t? You’ll put it on your lowest interest rate credit
card and pay it off as quickly as possible. That’s not good or bad debt; it’s
unavoidable debt. The same is true of medical debts. If you had the cash,
you’d pay for them outright, but sometimes you have to float them.
I often say debt is a savings killer. What I mean is that when you’re tied to
making big credit card payments every month because you’re carrying a
whopper of a balance, it makes it very, very difficult to save. But, by the same
token, savings (particularly emergency savings) is like debt insurance. When
you have a cash stash, you can bail yourself out of a number of jams. These
days, lots of people have both too little savings and too much debt
simultaneously. Although you get a much bigger payoff by paying down debt
than you do by building savings, I think it’s best to work the problem from both
sides—even if you have limited resources. Save half of your free cash; put the
other half toward paying down debt until you have $1,000 or $2,000 in savings.
Then continue paying down your debt. That way you have insurance against
incurring more debt along the way.
There is nothing inherently bad about credit cards. In fact, they are extremely
useful tools that, when used properly, can help you earn rewards, like cash
back or frequent flyer miles, for very little out-of-pocket expense. I’m often
asked how many cards you need. Most members of the military have at least
one credit card; 33% have four or more. I think two is the magic number. One
should have a very low interest rate. Use this card for any purchases that you
can’t pay off that month but instead have to pay off over time. The other
should give you some form of rewards simply for using it. In a perfect world,
you put all of your purchases on that second credit card, pay it off in full every
month, and jet off to some sunny locale thanks to your miles once every year
or so. If you need a separate card for business, that’s perfectly fine. (And note:
This is where you want to end up, but it’s not necessarily where you can start.
Sometimes it’s tough to get that first credit card, particularly if you’re young
and haven’t borrowed (and repaid) money before. Look for cards that are
targeted particularly to members of the military or, if you can’t find one, for a
secured credit card. You’ll deposit a small sum of money as collateral but it will
be refunded over time.)
You should be comparison-shopping for all of these cards (including the
secured ones) using a tool like the one I have at LowCards.com. That’s
something 46% of military personnel aren’t doing right now—and that’s a
mistake. The credit card industry is highly competitive. As I write this, there
are cards offering 0% interest rates on both new purchases and balance
transfers for 18 months, no annual fees, and/or 40,000 frequent flyer mile
bonuses simply for signing on. Those perks will change, of course, but shopping
around is a quick process that can save you a great deal of money.
The other benefit to credit cards in this data-breach-happy world is that
when you use one (as opposed to a debit card), your money isn’t on the line.
Credit cards have zero liability policies, which mean that if some thief gets his
hands on and starts using yours, the card company absorbs the loss. Debit
cards tend to have the same policies, but getting your money back can take a
couple of weeks, which is a major hassle.
If you can’t handle credit cards, however—if you’ve gotten into trouble with
them before, or if you find they tempt you to overspend—steer clear. You have
other choices. Which raises the question:
Lenders have some guidelines that make sense to follow when it comes to
evaluating your own debt. They like to see you paying no more than 28% of
your pretax income on housing (this includes your mortgage principal, interest,
taxes, and homeowners insurance). And they like to see you owing no more
than 36% of your pretax income on all your debts combined. The reason they
adhere to these guidelines is that they’ve proven to be levels at which
borrowers can make ends meet (when, during the housing bubble, lenders let
these guidelines slip away, many were very sorry later.)
As far as credit card debt and other unsecured debts (those not tied to an
asset that can be taken away from you if you don’t pay, like a home or a car)
are concerned, in my book, you have too much when either you can’t pay them
off every month, or you aren’t making substantial progress in paying them
down. Nearly half of the military population pays off their credit cards in full
each month. That’s ideal.
But other statistics from the FINRA Financial Capability Study are cause for
concern. In the past year, 57% of military personnel have carried over a
balance and paid interest. Nearly 40% made the minimum payment only. A
little fewer than 20% used their cards to take out a cash advance (a very, very
expensive way to borrow), while 15% paid fees for making late payments and
20% paid for going over their limits.
If you can make only the minimum payments on your credit cards, you’re
carrying too much debt. If your credit card debt makes it difficult for you to
afford other things in your life, you have too much. And if you have so much
that it’s weighing on you emotionally—or causing a rift in your relationships—
you have too much.
The military has its own ideas of what’s too much—in terms of obtaining or
maintaining your security clearances. If you have trouble paying your bills, are
not willing or able to pay your debts, have a gambling problem, or are proven
to cheat (or have cheated) on your taxes, you are in questionable waters, as
well. (Being able to show these events happened in the past, and that you’ve
made an effort to get on the right track, can help you get the clearances you
If you’re still having difficulty, however, you should try “The Debt Diet.”
The Debt Diet is a program I developed for The Oprah Winfrey Show based on
material in my best-selling book: Pay It Down. Perhaps some of you remember
it. I had a memorable tussle with the woman I was coaching in a hair salon.
She had her head in the sink at the time and you can currently find a video of it
on YouTube. In any case, the program got her out of debt and has helped
countless others, and if you’ve got too much credit card debt, it can help you,
too. Here’s what you need to do:
Assess the problem. List all your debts from highest interest rate to
lowest. Draw a line to separate the good debts from the bad. The bad are
the ones we’re going to focus on first.
Break it down. There’s a reason I called this program The Debt Diet.
Losing weight and getting out of debt have many similarities (in fact, on
Oprah, we found a lot of people on The Debt Diet lost actual weight). One
of those similarities is that it helps tremendously to break your goal down
into manageable benchmarks. Having 201bs. to lose sounds daunting. And
it is. But if you can think about losing 21bs. per week, it’s much less scary.
You also need a way to track your progress. With a diet you do: It’s called
a scale. Getting out of debt is the same. Let’s say you have $5,000 in
credit card debt. That’s intimidating—until you break it down with the goal
of paying off $50 or $100 a week. Then you can focus on coming up with
those smaller sums of money. And you have two ways to measure your
progress—your bills, which will be falling, and your credit score, which
should be going up.
Find the money to pay down your debts. The budgeting you did in the last
chapter will help you with this. But I prefer to keep it as pain free as
possible. Look at the small things you spend money on first (coffee, fast
food, manicures, and the like), and see what you can eliminate. If you
come up with your $50 or $100 there, you’re done. If not, look at midsized things, including your monthly bills (cable, cell phone, groceries),
and make cuts there. The bonus to cutting a monthly bill is that you save
12 times over the course of a year by taking a single action. Oh, and if you
routinely get a tax refund, change your withholding so that you’re getting
more in each paycheck and put that toward your debt. The final mediumsized item? The interest rates you’re paying on all your debts. If you can
lower them, you can often save a great deal of money. If your credit score
is good (720 or better on the FICO scale) or great (760 or better), you can
give that a go now by searching for balance transfer offers (make sure the
interest rate is low enough to account for any balance transfer fees),
refinancing your mortgage, or your car loan. But if your credit score needs
work, read the next chapter before you attempt to work magic. And if you
still haven’t reached your goal, you have to look at the bigger stuff. Are
you living in a place that’s too expensive? Do you have too many cars?
Sometimes taking a tour through your home with the express purpose of
looking for things to sell at a garage sale or online can be very effective.
And if trimming your expenses doesn’t do it, ask yourself how you can earn
more to pay down your debt faster.
(Note: Many people wonder if they should use the equity in their homes to
refinance credit card debt. It makes financial sense. The interest rates are not
only much lower, but they’re tax deductible. But, you’re turning an unsecured
debt into a secured debt—credit card debt is unsecured, meaning the lender
can’t take anything from you if you default; a home equity loan is secured by
your home, meaning—you guessed it!—they can. Moreover, people who do this
often run up their credit cards again in short order. So I’d only suggest it if you
know you can keep your hands off.)
Once you’ve found the money, it’s time to actually pay the debt down. You
want to take all the extra money you’ve managed to find and throw it
against the highest interest rate debt on your list while making minimum
payments on the rest. This is called the Debt Avalanche and it is the
fastest, cheapest way to dig out of debt. Once that debt is paid off, put the
card in a drawer, freeze it in ice, give it to your mother (don’t close the
credit card—that’ll hurt your credit score. You’ll find out why in the next
chapter), and move on to the next.
So many choices, which one to use when? Before we get to that, a brief
introduction to prepaid cards for those who haven’t used them.
Prepaid cards are like a checking account without the bank. You obtain a
card—often at a store, but sometimes through a card provider—and load
money onto it. Like all financial services products, they have their pluses and
In the pluses column, they can be beneficial for consumers who don’t have a
checking account, either because they can’t qualify for one or because they
don’t want to use a bank. (All though all members of the military are required
to have bank accounts for paycheck deposits, some family members might not.
If you don’t have a banking relationship, I’d encourage you to get one. Not
having a bank or credit union means you’re paying excessive fees every time
you cash a check. There is a plethora of banks and credit unions with accounts
and services that cater specifically to members of the military and their
families. You can find a list of them here. A prepaid card can also be a helpful
budgeting tool, because you can load only the money you want to spend onto
the card, preventing you from tapping into savings or into money in your
checking account that is earmarked for the rent or mortgage.
As for the minuses, there are several. Prepaid cards do not report your
spending/bill payment behavior to the credit bureaus, so they don’t help you
build a credit history. And they often come with significant fees—the card may
charge a monthly maintenance fee, plus other fees for services like ATM cash
withdrawals and deposits onto the card. The one use for which I’ve sometimes
recommended prepaid cards is for teenagers as a means of giving an electronic
allowance—but I think it’s just as effective (and cheaper) to open checking or
savings accounts for your children, linked to your own, and give them
allowances by making (free) automatic electronic transfers each week from
your account. I do that with my kids. It also has the advantage of more easily
enabling me to keep an eye on their spending behavior.
So for most consumers, the choice is squarely between a debit card and a
credit card. And even that isn’t a choice—I suggest you carry both, as they
serve different uses in in your wallet. But which one should you reach for
when? Let’s go through some pros and cons.
You’re spending your own money, which means you’re forced to live within
your means. You don’t have to worry about paying interest.
People tend to spend less when using a debit card than when using a
credit card (the same, by the way, goes for cash: If you use cash, you’ll
spend less than you would with a debit card. And if you keep large bills in
your wallet, you’ll spend even less).
You’ll have no bills to pay later, which means no possibility of late fees.
They’re easier to obtain than credit cards, if you have a low credit score.
Limited, if any, rewards programs.
Some banks will charge fees. You might pay a monthly service charge for
your checking account (though it can often be avoided if you have direct
deposit or maintain a minimum balance—and some banks offer special
free or low-cost accounts for military members).
If someone steals your card, you likely won’t be liable for the purchases
the thief makes, but you’ll have to jump through a few administrative
hoops to get your money back, which may leave you in a bind for a few
days or even a couple of weeks . . . not to mention to potential hassle of
bounced checks and other problems in the meantime.
Account blocking. Hotels, for example, will generally put a hold on a
certain amount of your money, just in case you run up a high bill. Gas
stations and rental car outfits often do this as well. These folks want to
make sure you have enough to pay their bills. But this practice can cause
you to overdraw.
Debit cards don’t help you build credit.
Credit history. Card companies regularly report to the credit bureaus on
your payment behavior. As long as you’re paying your bills on time and not
using too much of the credit you have available to you, this history can be
very helpful when it comes time to take out a mortgage or car loan.
Rewards. You can get a card with almost any perk, from frequent flyer
miles, to cash back, to free gifts. But keep in mind that studies have
shown that consumers tend to spend more on rewards cards. And rewards
cards generally have higher annual fees and interest rates than standard
cards, so they should only be used if you plan to pay off the balance in full
each month.
Consumer protection. If you’re legitimately dissatisfied with a purchase or
service, and you paid by credit card, your issuer will often stand behind
you and you can withhold payment. Other perks, which vary by card
issuer, are price-matching policies, extended warranties, and travel
Zero liability. You get more protection in the event of theft and fraud,
because it isn’t your money being spent when a thief makes a purchase on
your account. Unlike with a debit card, you don’t have to worry about not
having access to your funds while the bank sorts things out.
Lowered interest rates for active duty military. The Servicemembers Civil
Relief Act (SCRA) requires lenders to cap interest rates at 6% on loans
members of the military incurred before entering the service. You have to
request the rate reduction in writing and provide proof of your military
orders. (Note: This cap applies to not just credit card debt, but mortgages,
car loans, and federal student loans—but it only applies to debt that was
held before active service began, which means if you run up credit card
debt while in service, it won’t apply.) We’ll get into more detail on this in
the next chapter.
Interest. This is a biggie. If you don’t pay your balance off every month,
you’ll pay for it. Even a 6% interest rate is money that would’ve been
better spent (or saved) elsewhere.
Late fees. If you don’t make your payment on time—and in the world of
credit cards, that actually means early—you’ll pay a hefty fee (late fees
can run $35 a pop) and damage your credit score.
Consumers spend more on credit cards than they do using debit cards or
cash. Why? It doesn’t feel like “real” money.
Finally, a word about loans you should steer clear of, no matter what. As you
likely know from living on or near a military installation, predatory lenders—
those offering payday loans, cash advances, and other short-term loans with
disproportionately high fees—are all around. A recent study by the Department
of Defense found that Soldiers, Sailors, and Airmen are as much as four times
more likely as civilians to be victims of payday lenders, due to this easy access
and the financial burden of frequent deployments and relocations. Indeed,
according to the 2012 Survey of Military Finances over one-third of military
personnel say they’ve used non-bank borrowing methods like payday loans, tax
refund advances, and pawn shops—35% have used at least one within the last
five years, 21% have used two or more.
This is incredibly troubling. Why? Because the amounts you pay for these
loans are ridiculously high. The Center for Responsible Lending says that the
typical payday loan borrower pays annual interest rates of 400%.
Why aren’t there consumer protections in place? In fact, there are, but
unscrupulous lenders have found some wiggle room. The Military Lending Act,
which was passed in 2007, says that active duty members of the armed forces,
as well as those on active Guard or Reserve duty (and their spouses and
dependents), cannot be charged interest at a rate higher than 36% on certain
payday loans, auto title loans, and tax refund anticipation loans.
That 36% cap—which is called the military annual percentage rate (MAPR)—
not only includes interest, but fees, credit service charges, credit renewal
charges, credit insurance premiums, and any other fees for credit related
products that are sold with your loan. There are other provisions, as well.
Creditors have to provide you with written and verbal disclosure regarding
what interest rates and fees you’re going to pay before you get your loan. They
can’t roll over a prior loan into a new one unless it’s a better deal for you, or
charge you penalties for paying back your loan early. And importantly, they
cannot require you to make your payments through allotment—where they
electronically zap money from your paycheck before you receive it.
Unfortunately, that doesn’t mean these things never happen. Under the
Military Lending Act, a payday loan is defined as a loan with a term of 91 days
or less and that doesn’t exceed $2,000. An auto-title loan has a term of 181
days or less.
As The New York Times reported in late 2013, lenders work around the law
by issuing “loans for more than $2,000, loans that last for more than 91 days
and auto-title loans with terms longer than 181 days.” The interest rates on
these loans, according to analysis by the Consumer Federation of America, can
be more than 80%. The Times names the following companies as leaders in
this business: Just Military Loans, Military Financial, Pioneer Financial and Omni
Military Loans. Military members reported that not only were they told they
couldn’t get loans without agreeing to the allotment system, but that in other
cases “service members said . . . if they fell behind [on payments] the lenders
would go to their commanding officers.”
Bottom line: Avoid these loans, as appealing as the quick cash may sound in
the moment. A cash advance on a credit card—not something I would
ordinarily recommend—is a much better alternative. And if you feel you have
been taken advantage of by a payday lender, complain to the Consumer
Financial Protection Bureau here: Submit a Payday Loan complaint. Your issue
will be forwarded to the company, you’ll receive a tracking number, and the
CFPB will keep you up-to-date on the status of your complaint.
Establishing—and Maintaining—
Good Credit
Good credit is essential to any successful financial life. In civilian life, in
addition to impacting your ability to borrow at a reasonable interest rate (if at
all), it helps determine how much you pay for homeowners and auto insurance,
whether or not you can rent an apartment, and, sometimes, your chances of
landing a job. In the military, all of these things are also true—but your credit
status can have an even bigger impact.
As noted in the last chapter, there are times when the military won’t let
someone who has excessive debt issues or a subpar credit score join. There’s
no set formula or credit score requirement, but your credit worthiness and your
bill payment history will impact your ability to serve. Beyond that, a poor credit
score can affect your security clearance, or prevent you from getting the level
of clearance that your job requires. (According to a report from
CreditCards.com, “an average 1 to 2 percent of security clearance
investigations result in denial or revocation.” Of those, 20 to 30 percent are
based on financial issues.) That includes a wide swath of positions.
How do you keep your credit score in the good to excellent range? First, it
helps to understand a little bit about how credit scores work.
Your credit score, in plain terms, is a numerical representation of the
information that has been collected on your credit report. Aside from your
name, address, and other identifying factors, your credit report lists all of your
accounts (along with when they were opened—and, if applicable, closed—the
account balance, credit limit, and payment history), credit inquiries, and public46
record information like collections, liens, or bankruptcies.
You’ve likely heard of your credit score referred to as a FICO score. That’s
because one company, called FICO, has dominated the credit-scoring industry
for many years. It calculates your score based on the information in your credit
reports and weights it based on a variety of factors.
Actually, to say it calculates your score is a bit of a misnomer. It calculates
your scores—you have many different credit scores. If you’ve ever pulled a
copy of your credit scores simultaneously from each of the three credit bureaus
—Equifax, Experian, and TransUnion—you likely suspected that. Although many
of the big, national creditors report the same information about you to all three
bureaus, there are some regional and local creditors that may report to one
but not the others, and vice versa. When your Equifax score is processed, it’s
based on the information in your Equifax report, which is different than the
information in your Experian report.
Complicating matters, different creditors ask the credit bureaus to analyze
the data in your report in ways that make sense specifically for their needs. An
auto lender, for example, cares about the fact that you pay your credit cards
on time, of course, but it cares more about your payment history on your last
car, so that’s given extra weight. The same goes for mortgage lenders, credit
card companies, etc.
Finally, although FICO is still—by far—the biggest player in the game, a
competing score company, called VantageScore, is nipping at FICO’s heels. The
biggest difference between the scores the two calculate as been that
collections you've paid off still weigh negatively on your FICO but not your
Vantage scores. FICO recently adopted the same methodology, which is good
news for people who are just getting their acts together.
All in all, though, the fact that there are so many scores—more than 50 by
some counts—is enough to make you dizzy. The thing to remember is that all
of these scores move up or down based on, essentially, the same factors.
These are the things you want to pay attention to if you’re trying to improve
your score. Here is a general guide to the components that determine your
credit score—and how much weight each element carries.
Source: myFICO.com
Utilization ratio: 30%. Your utilization ratio is the amount of debt
you’re carrying compared to the amount of credit you have available to
you—in other words, your credit limits. The score model looks at this on
each account individually, and on all of your accounts combined. That
means carrying a high balance on one card and leaving the others at zero
won’t skirt the system.
Utilization can be confusing, so let’s use an example: Say you have a
credit card with a $5,000 limit and a balance of $4,500. That’s a high ratio
—you’re using 90% of the credit available to you on that card. That might
negatively affect your score, even if you have other cards with zero
balances. And if you have, for instance, four credit cards with a combined
$7,000 balance, and a combined $10,000 limit, that’s also too high at
70%. You want to keep your utilization ratio at 10% to 30% or less.
Payment history: 35%. I mentioned this is important, and for good
reason: Your payment history tells future creditors whether you pay on
time. Slipping up just once can lower your credit score, so it’s important to
pay your bills on time, every time. Help yourself do this by setting up auto
payments, calendar alerts, and by paying bills as you receive them. And
note: You are responsible for your bills, including debt payments, while
you are deployed. You want to designate your spouse or another family
member or friend as your power of attorney, which allows him or her to
make financial decisions on your behalf, in case something comes up and
you’re unreachable.
Length of credit history: 15%. Creditors want to see that you’ve been
able to maintain lasting relationships with other creditors, which means
that keeping accounts open—even if you’re no longer using them—is
helpful to your score. The one exception: If you’re paying an annual fee,
you may want to cancel the credit card and get that extra expense out of
your life. But cancel the card at a time when you’re not planning to apply
for major credit in the next six months or so, to soften the blow.
New credit: 10%. If you’re constantly shopping for credit and opening
new accounts, it looks to creditors as if you need money. That’s not the
picture you want to paint. So say no when the salesperson asks if you
want a store credit card to save 10% that day, and only open new
accounts when it is absolutely necessary.
Type of credit: 10%. The credit-scoring model likes to see a mix of
different kinds of accounts on your file—a mortgage, car loan, student
loan, credit cards. That’s not to say you should take out debt to boost this
portion of your score, but if you have these types already—and you pay
them on time—it may help.
After considering all of this information, FICO will calculate a score for you
that falls somewhere between 300 and 850. There’s no need to shoot for the
stars—not many people, including myself and credit experts I’ve spoken to, can
claim an 850 credit score. Instead, aim for a score of 760 or above, which will
allow you access to the very best interest rates.
(Note: What if you see a score that’s higher than 850? You’re looking at an
older version of VantageScore’s rating, which until 2013 was calculated on a
scale of 501 to 990. It now matches the FICO score in terms of range.)
As far as how you can find out where you stand, your credit history will come
to you in two parts—the score and the report. Members of the military and
their spouses can access their FICO credit score for free as part of an initiative
by the FINRA Investor Education Foundation. In order to obtain your score, you
need to contact a military financial educator at your nearest Personal Financial
Management Services Office. He or she will be able to assist you. Additionally,
all military instillations with a base financial office will provide free credit
reports as well as credit scores to all service members.
If that’s not convenient for you, there is another way to get your credit
report for free: Request it from the website AnnualCreditReport.com. (About
two-thirds of military personnel have done this within the last year, which
means that about one-third have not; if you’re among those who haven’t, take
the time to do this ASAP.) You’ll be able to access one copy of your credit
report from each of the three major credit bureaus each year, which means
you actually have the ability to pull your report three times a year for free. I
recommend you do that once every four months. Not all of the information is
the same across the reports—some lenders may disclose information to only
one credit bureau; others will send details to all three. But much of it is, and
you’ll want to check your report regularly for accuracy. Look at your name,
address, and all account information, and if you find an error or an account that
isn’t yours, contact the credit bureau for a correction. All three will allow you to
dispute information on their websites.
I mentioned that your credit score helps determine your interest rates, among
other things. But how much of a factor is it, really? Let’s look at two examples
—a $250,000, 30-year fixed-rate mortgage, and a $20,000, three-year auto
loan. Interest rates may have gone up (or down) by the time you’re reading
this, but don’t worry about that. What you want to focus on is the difference in
interest rates for good—and not so good—scores.
FICO Score
Monthly Payment Total Interest Paid
FICO Score
Monthly Payment Total Interest Paid
Source: myFICO.com 11/22/2013
There may be a time when you run out of money before your next paycheck
arrives. What if you find you just can’t pay all of your bills every month? Of
course, I don’t want you to get to that point. But in case you do, here’s your
game plan.
First, call your creditors. Explain what’s going on and ask what they can do to
help. They may be willing to put you on a different payment plan, or lower
your interest rates temporarily. Creditors have special “work out” departments
for this reason and, believe me, after the recession, you’ll hardly be the first
call like this they’ve heard.
Then, pay your bills in this order:
1. Necessities, like your mortgage, rent, car payment, food, plus heat,
electric, and water bills, get paid first. Why? Because life without them
doesn’t really work. If your car gets repossessed and you can’t get to work,
there goes your paycheck. Child support comes at the top of the list, too,
as do medical bills, because you want to be able to go to the doctor.
Research shows that health expenses have been a problem for service
members—16% of whom overall, and 26% of enlisted personnel, have
unpaid medical bills. (These debts often include co-payments, uncovered
expenses, or bills from the time period before a person entered military
2. Uncle Sam—specifically the IRS—is second on the list, accompanied by
student lenders. The reason for this is that they have got the power and
ability to garnish your wages. If you don’t work out a way to pay them,
they’re going to come and take the money anyway. If you owe back taxes,
the best way to deal with them is to contact the IRS and work out a
payment plan. This is not a difficult thing to do. As long as your debt is
less than $50,000, complete and file form 9465 ,which is an Installment
Agreement Request. Fees for setting up an installment program range
from $52 (if you agree to have your payments direct debited) to $120 for a
standard agreement, which often incorporates paycheck deductions.
3. Everything else on the list—in other words, the wants rather than the
needs in your life—should be third. It all comes down to asking what can
be taken away from you if you don’t pay. Your credit card bills fall to the
bottom of the list because, although your credit score will deteriorate fairly
quickly, nothing else can be taken from you; these debts aren’t
guaranteed by belongings, like a house or a car.
If this is not an unusual situation—or if you go through all of the steps I’ve
outlined and still can’t see your way clear—you may want to meet with a notfor-profit credit counselor. You can find one who is a member of the National
Foundation for Credit Counseling through the website nfcc.org.
A credit counselor runs you through an intake process (a free, sit-down
meeting) during which they’ll assess your needs. About one-third of the time,
the counselor will figure out that by adjusting your spending and re-allocating
the money you have coming in, you actually can make ends meet on your
income. About one-third of the time, the counselor will determine that you
have too much debt for counseling to be sufficient and recommend you see an
attorney about filing for bankruptcy. And the final third of the time, the
counselor will recommend something called a debt management plan, a
specific action plan to pay down your debt.
Debt Management Plans are structured payment plans. The deal is that the
counseling service will have negotiated lower interest rates for you—generally
6%. From that point on, you’ll start sending your payment not to your
creditors, but to the counseling agency, which will then make payments for you
out of that pot, taking a small fee. Any late fees and penalties you may have
racked up with your creditors will generally be waived. But you’ll have to agree
to stop using your credit cards completely. Successfully completing a DMP is
not a quick process. It generally takes four or five years, and many people drop
out along the way. But if you can stick with it, you’ll often come out with a
higher credit score than when you went in simply because your payments will
have been made on time and you’ll have reduced your credit utilization.
The other helping hand available to you where your credit/debt obligations are
concerned is the Servicemembers Civil Relief Act (SCRA). Passed in 2003, it
updated a prior act that dated all the way back to 1940, and it’s meant
specifically to help families on or called to in active duty, or if you are absent
from duty as a result of being wounded or having been granted leave. It
applies to reservists and members of the National Guard while on active duty
as well. And many provisions apply to service in the US, not just when you are
deployed abroad. In order to invoke your protections, typically you will need a
copy of your military orders. Here are the protections available to you:
Interest rate caps. During active duty, interest rates on credit cards,
mortgages, and other pre-service debt will be capped at 6% per year. On
mortgages, the 6% rate will stay in force for a year after you leave active
duty. (Note: The 6% cap doesn’t apply to student loans, new loans taken
out, or new credit card charges accrued while on active duty.) Lenders also
are not permitted to deny or revoke credit, or to change the terms of your
existing arrangement with them, because you seek protection under this
Eviction protection. Landlords (with some restrictions) cannot evict a
service member, or his/her dependents while that service member is on
active duty, without first obtaining a court order.
Lease-termination rights. A renter may terminate—without penalty—
leases signed before the renter was called to active duty. You also can
reclaim your security deposit. This applies to leases on residential or
business properties.
Vehicle lease-termination rights. Similarly, car and truck leases can be
terminated as long as active duty lasts 180 days or more. If the vehicle
lease was signed while on active duty, it can be terminated if you receive
orders to PCS or deploy outside the US for 180 days or longer.
Cell-phone termination rights. If you are relocated to an area that
does not support your cell-phone service for at least 90 days, you have the
right to terminate your contract without penalty. In some circumstances,
as long as you are relocated for three years or less, you have the right to
retain your cell-phone number.
Foreclosure/repo relief. Real estate may not be foreclosed upon and
vehicles may not be repossessed without a court order if payments are not
made (or other terms of the contract are violated) because of active
military service.
Life/health insurance protection. Life insurance is protected against
lapse, termination, and forfeiture for nonpayment of premiums or
indebtedness for the period of military service plus two years. Health
insurance that is cancelled when on active duty typically can be reinstated
without loss of benefits, waiting periods, or penalties.
Ability to delay civil court proceedings. Courts must delay
bankruptcy, divorce, foreclosure, or other proceedings if military duty
requirements affect your ability to appear.
State tax relief. If you are required, by military order, to move from your
home state to another state, you will not be required to pay state taxes on
your military income (or your personal property) to the new state.
Effective beginning in 2009, the Military Spouse Residency Relief Act
allows your spouse to be treated similarly for tax purposes .
Finally, taking advantage of the protections of the SCRA cannot result in
negative marks on your credit report—or your ability to obtain credit or
insurance in the future. For detailed information about how to invoke your
rights under SCRA, contact your local Armed Forces Legal Assistance Program
office. You can find the nearest location here. There are also some legal cases
in which it may be suggested that you waive your SCRA rights. This is possible,
but has to be done in writing, and should never be done without consulting an
Homeownership is often deemed an integral part of the “American Dream.” But
that’s not a one-size-fits-all vision. These days in particular, perhaps as a result
of our country’s experience with the housing boom and bust over the last
decade, homeownership isn’t for everyone. And it may not be for members of
the military, particularly those on active duty.
Why? Because of the nature of the job and the frequent moves involved. The
general rule of thumb is that if you buy a home, you should plan to live in it for
at least five years in order to have the best chance of recouping your
investment—and then some. This time frame aims to account for fluctuations
in the market and real estate agent commissions when you sell. Many activeduty military personnel won’t be able to commit to three years in one location,
let alone five.
And yet, many still buy homes. According to the most recent survey of Blue
Star Families, 65% to 70% of military members live in off-installation housing.
Of them, 50% own homes. (Most of the time, they live in these homes;
occasionally they lease them to other tenants—a by-product of not wanting, or
being unable, to sell. More on that momentarily.)
Why is buying such an attractive option? The housing bubble has convinced
many people that there is the potential of a (pun intended) home run. Many
think: “I can buy now, live there for three years, rack up substantial real estate
gains, and when I get out, pocket some significant dough. Or, even if I can’t
sell, I can put on my landlord hat and make some passive income by renting it
out to other military folk who come through.”
This kind of thinking has gotten no small number of people into financial hot
water. According to data from FINRA, 38% of military homeowners are
underwater on their mortgages. That’s a substantially higher average than the
population at large. Additionally, 10% have been involved in a foreclosure
proceeding in the last two years (also more than the population at large). And
22% of mortgage holders have been late with a payment at least once in the
past two years.
The point: If you’re still in the stage of military life in which you’re moving
around every few years, consider renting. It is a flexible choice that won’t leave
you stuck with a home you can’t sell when you’re suddenly transferred to a
new base. We’ll talk about the pros and cons here—and explore the pros and
cons of homeownership for when you’re ready to enter that stage of your life.
As active duty military personnel well know, most bases have a very limited
supply of on-base housing. If none is available, you’ll rent off base and use the
money the military gives you for housing (called a Basic Allowance for Housing
or BAH) to help pay for the rental you choose. Make sure your lease has a
military service clause that will allow you to break it, without penalty, in case
you’re transferred. For good measure, ask the housing referral office to look
over a copy of your lease to make sure it’s in good shape before you sign.
Flexibility: If your situation changes—a concept I know you are
intimately familiar with—there are no strings attached. The worst-case
scenario is that you may have to break a lease, which, while not ideal, is
workable, particularly under the terms of the Servicemembers Civil Relief
Act. Even if you don’t fall under those provisions (and if you don’t have a
military clause in your lease), in military areas, you’re more likely to
encounter a landlord who will offer a short-term or month-to-month lease,
or at least flexibility, if you need to get out early.
No taxes, maintenance, or insurance:—save for a renters insurance
policy, which is a must. Some landlords also foot the bill for a portion of
the utilities. And there’s something to be said for calling in (free) help
when your ceiling springs a leak or the toilet overflows, particularly if
you’re without a robust emergency fund.
Lower initial investment: Most homebuyers strive to put 20% down
(though there are programs for service members that require no down
payment, which we’ll get into shortly). When you rent, your initial outlay is
limited to the first and last months’ rent and a security deposit.
No equity: Your monthly rent payment goes toward paying off the
landlord’s investment in the property, not yours.
Lack of control: You’re not going to be able to screen the neighbors, so
you won’t know if they have a dog prone to barking or children likely to
run in the apartment building’s halls. You may not be able to make design
changes, though some landlords will allow small updates, like paint.
Budget fluctuations: A landlord is likely to raise your rent on a yearly
basis, and that can shake up a budget. If you’re financed into a fixed-rate
mortgage, on the other hand, your payment is set and will not change.
Quality: Some service members complain that the housing options
available for rent pale when compared with the sort of house they’d buy.
(Non-service members often have the same complaint, for the record.) If
you’re planning on renting, make sure to look into options from the Military
Housing Privatization Initiative in your area. This is a public/private
partnership where private developers build, own, operate, maintain, and
assume responsibility for military housing. What this means is that if you
have a problem while you’re living there, you complain to the private
developer. According to data from Blue Star Families, 49% of military
personnel surveyed say the quality of MHPI housing is good compared with
traditional housing.
Once you know you’re going to be in one location for at least five years—which
many not happen until you leave military service—buying becomes a very
attractive option. Not only will you have the opportunity to share in the growth
of real estate prices in your area but also, in paying your mortgage, you’re
building what will essentially be a supplemental savings account that can be
used at retirement. If you’re still active, your BAH can be used to pay all or
part of your cost of housing as well (more on this in the next section).
Equity: When you send in your mortgage payment each month, you are
slowly building some equity in your home. You can tap that equity in the
future if you need to, via a home equity loan or line of credit, for home
improvements or other expenses. It’s worth noting, however, that if you
sell every time you’re transferred to a new location, you’re unlikely to build
much—if any—equity.
Tax advantages: You can deduct the mortgage interest and property
taxes you pay each year.
Complete control: No, you still can’t pick your neighbors. But you can
make creative design choices beyond paint, like remodeling a kitchen or
bathroom, putting up a fence in the backyard (at least you won’t have to
see the neighbors), and knocking down walls if you want to change a
Helps build credit: You’ll need good credit to rent, too, but most small,
private landlords aren’t likely to report your monthly payments to a credit
bureau, which—if made on time—will help improve your credit score.
Maintenance: You have to pay for those design choices—as well as a
busted pipe, leaky roof, and broken furnace. On average, maintenance
runs about 1% of the home’s value per year. You do the math.
Limited flexibility: Sure, you can sell. But it may take time, depending
on the market, and you may take a loss, which could require permission
from the bank if you’re selling for less than your remaining mortgage
balance. You can’t simply pick up and move like you can with a rental.
Bigger initial investment: Again, there are programs that may allow
you to avoid a down payment, but as we learned coming through the
housing downturn, you’re better off not using them. Plus, you’ll still be on
the hook for fees.
Missteps will harm your credit: Miss a payment? Have to sell at a loss
and negotiate a short sale with the bank? It will go on your credit history,
which could hinder you when it comes to future home purchases.
If you’re still having trouble deciding, try following this flow chart to your
The first thing to keep in mind when shopping for a home and mortgage is your
housing allowance (this is true, too, if you decide to rent—your housing
allowance should help dictate your budget). The military gives you a Basic
Allowance for Housing based on your geographic location, pay grade, and
whether or not you have dependents. It can be quite generous—in 2013, for
example, an E-1 with no dependents would receive $1491 in San Diego,
California. A high-ranking officer could receive up to $2487. Add in dependents
(it doesn’t matter how many), and you were looking at $1986 for a low-ranking
officer and $3180 at the top of the scale. (To find out what you’re due, you can
run the numbers through the BAH calculator here.)
That amount is set, and doesn’t depend on the cost of the home you’ve
chosen (or the cost of your utilities which BAH is also expected to cover), which
means if you settle in a lower-cost living arrangement, you can pocket the
difference. Purchase or rent something more expensive and you’ll pay the
excess out-of-pocket.
Of course, staying within the bounds of your housing allowance is sage
advice while you’re still active. Once you’re out of the service, the parameters
you should stay within are the ones outlined in the chapter on budgeting. You
don’t want more than 35% of your income to go toward housing. (If you’re
applying for a mortgage, the lenders—who like to see no more than 28% of
your income go toward mortgage debt, and no more than 36% of your income
go to debt overall—will help you stay within those lines.) But the cost of
housing doesn’t mean only looking at the purchase price/mortgage payment
when deciding how much house you can afford. You want to look at the cost to
own, rather than just buy, a home—and that includes a range of expenses.
Some will show up on the Good Faith Estimate form you’ll see when you’re
making a purchase, but others won’t. Let’s run through them:
Homeowners insurance: You want to insure your home for the cost to
rebuild, not the cash value, and you don’t need to include the cost of the
land on which your home sits. Still, homeowners insurance is pricey—the
average annual premium of $978 can add more than $80 to the cost of
your monthly mortgage payment.
Property taxes: These are taxes calculated by the county in which you
live. You can typically find them, along with the number of beds and baths
and other salient details, on a real estate listing, or you can get an
estimate from your local assessor’s office. Many counties and real estate
agencies also have calculators on their websites.
Maintenance: This is typically 1% of the value of your home annually.
On a $200,000 home, that’s $2,000 per year. And that argues for having a
hefty emergency cushion in the bank, so you can dip into it when you need
a new washing machine or your pipes freeze, and subsequently burst.
(Note: Don’t be fooled when you don’t spend the full 1% in the first year.
These costs tend to be cumulative, which means the following year, you
might spend double. Keep the money in the bank and you’ll be glad you
Cost of living: The military factors this in when moving you to a new
area; it’s considered when determining your housing allowance, among
other things. But you should also look at factors like your commute (and
resulting gas costs), the public school system (and whether it calls for
sending your kids to a private alternative), the cost of community activities
your family enjoys, and even expenses like groceries, restaurant meals,
and entertainment.
Homeowners association: If you’re buying in an area that has a
homeowners association, you need to factor any associated fees into your
monthly budget. That may reduce the amount you can spend on a
mortgage payment while simultaneously reducing the amount you have to
spend on other necessities (like lawn maintenance and snow removal). So
be sure to do the math; these charges can be as high as an apartment
rent, hitting $500 and above. Ask for a history of charges as well, so you
know how often they go up and can plan for it in advance.
Once you know you’re in the market to buy, it pays to get pre-approved for a
loan. This is different than getting pre-qualified; it’s a more thorough process.
When you get pre-qualified, you provide information to a lender who uses that
information to estimate how much you could potentially borrow. Pre-approval
involves providing the lender with many of the same documents you’d present
in your mortgage application process—pay stubs, tax returns, bank statements,
etc.—and allowing the lender to check your credit. At that point, the lender
pre-approves you to borrow a certain amount. If you enter into a bidding war
for a particular house and you’re pre-approved but the other buyer is not, you
have an advantage. The seller has a greater level of assurance that the deal
won’t fall through because you’ll be unable to get financing. Pre-approval also
makes what can be a tedious mortgage process quicker and easier.
The next step in buying a house is to shop around for financing. As a member
of the military, you have access to loan options that civilians don’t, including
the VA Home Loans program (more later about this, and how it compares to
traditional funding options).
Even so, you want to compare all of your financing options to make sure you
snag the best deal. There are two big steps to this process: Start by figuring
out what kind of mortgage you want, then compare rates from lenders. When
you’re deciding what type of mortgage you want, these are the factors to
The term of your loan: This is the number of years for which you’re
borrowing the money. Most commonly you’re deciding between a 15-year and
30-year loan. There are pros and cons to each: A 15-year, fixed-rate mortgage
will carry higher monthly payments and, generally, a slightly lower interest
rate, though that’s not always the case. On the plus side, you’ll build equity
faster and own your home outright in half the time. This can help protect you
in the event your home loses value and you need to move quickly, as we
talked about in the previous section. With a 30-year loan, your monthly
payments will be lower, your interest rate slightly higher. But that will give you
more wiggle room in your budget to account for taxes, maintenance and
insurance, plus other monthly expenses. One suggestion: Toe the line by
taking out a 30-year loan, but making more than the monthly payment each
month. Most loans don’t have a prepayment penalty, which means you can
prepay as much as you’d like. That way, you’re paying down the loan faster but
giving yourself the flexibility to fall back on the lower payment if you get in a
bind or have a tight month. You may occasionally find other fixed-rate options
—like 20-year or 10-year loans. These can make sense if you’re trying to
ensure your mortgage ends at a particular time, like when your kids are going
to college or you’re planning to retire. If you’re refinancing and don’t want to
stretch out the clock, they may also make sense.
Fixed- or adjustable-rate loan: Fixed-rate mortgages provide you with
the same interest rate—and therefore the same monthly payment—from the
first month of your loan to the last. The most common fixed-rate mortgage is
the 30-year, fixed-rate loan, though a 15-year fixed, as mentioned above, is
also fairly widespread.
Adjustable-rate mortgages, or ARMs, have interest rates that, as the name
suggests, move. A one-year ARM has an initial rate that is fixed for the first 12
months. After that period, the interest rate adjusts up (or down) with market
interest rates. Often the adjustment is tied to the prime rate, but in other
cases, there are LIBOR (which stands for London Interbank Offered Rate) and
COFI (which stands for Cost of Funds Index) ARMs. Typically, the amount your
rate can rise in a single year is capped at two percentage points and the
amount it can rise overall is capped at six percentage points. But, to be safe,
you’ll always want to make sure you know the terms of your particular deal.
One big benefit to ARMs—and the reason many people choose them—is that
based on a lower initial interest rate (than you’d get on, say, a 30-year fixed at
the same time), you can qualify to buy more house. Unfortunately, if your rate
jumps so high that you’re unable to easily afford it, you’re in for financial
trouble down the road. This is what happened to many people during the
housing bubble-and-burst. Housing values were increasing so far and so fast
that lenders loosened the reigns on their borrowing formulas. They figured it
didn’t matter if people didn’t have the income to support the loan; the added
value on the property itself would more than make up for it. Instead, real
estate prices turned tail, unemployment spiked, and many homeowners ended
up underwater with loans payments they couldn’t afford.
That said, one-year ARMs are not the only option. There is another type of
mortgage called a hybrid ARM. These loans are fixed for the first three, five,
seven, or 10 years, and then begin to adjust annually thereafter. A 5/1 ARM,
for instance, will have a total term of 30 years. It will be fixed for the first five,
and then have the ability to adjust once per year for the remaining term, or 25
years. (And, as an example, of how rates can go down as well as up, borrowers
who took out an ARM in the middle of the last decade started out with rates in
the 6% range. In late 2013, they were sitting at around 3%.)
These can be a very good fit for military families. If you know (or suppose)
that you’re only going to own your home for three, four, or five years, you may
want to consider a 3/1 or 5/1 ARM. The smaller the number of years in your
fixed term, the lower the interest rate is likely to be. Just remember, if you
take out a loan in the near future, you’re starting with historically low interest
rates. So you need to plan for the eventuality of higher rates, as rates will
almost certainly be higher five years from now than they are today.
Once you’ve landed on the type of loan you want, you can start shopping.
Mortgage rates, like those for home equity loans, credit cards, and pretty much
any other instrument with an interest rate, vary widely, so you’re going to want
to cast a wide net.
I suggest launching your search online, where you can get a sense of
average rates, both nationally and in your area. Two websites in particular are
a great help: HSH.com and Bankrate.com. Both track rates, offer mortgage
advice, point you toward lenders who are offering competitive rates, and
feature calculators that can help you target how much home you can afford
and what your monthly payment might be.
Offline, check rates with your local banks (both large and small) and credit
unions. Also ask friends, family members, and your realtor if they have
recommendations for a mortgage lender. Your real estate agency or home
builder (if you’re purchasing new construction) may have in-house finance
departments, but that doesn’t mean they’re offering the best rates, so be sure
to compare with outside lenders as well.
Then, take all of that information you’ve gathered and compare what you’ve
been able to find with the VA Home Loans program.
Private lenders, like banks and mortgage companies, offer VA loans, but the VA
guarantees part of the loan so you may get more favorable terms. These can
include being able to skip the down payment (generally 10% to 20% of the
home’s purchase price) if the home’s purchase price doesn’t exceed the
appraised value, without having to pay private mortgage insurance (PMI).
Lower interest rates may be part of the package, as may the ability to take on
more debt with less income. Closing costs (as long as they don’t exceed 6% of
the home price) may also be paid by the seller, which means you can literally
walk into the home with very little money down. No wonder 60% of veterans
who have ever obtained a mortgage, refinanced a mortgage, or taken out a
home equity loan or line of credit have utilized the program at some point.
The current cap (as of 2014) on a VA loan guarantee is 25% of a loan
amount up to $104,250. Because a VA loan can cover up to 100% of the
purchase price of a home, the maximum mortgage in most locations is
$417,000, although it can rise to more than double that in certain areas.
The downside? Excepting veterans who have a service-connected disability
and spouses of deceased veterans who qualify for the VA loan, you will need to
pay a funding fee, which is a percentage of the total loan amount. In most
cases the fee is roughly 2% of the loan amount, but it varies between 0.5%
and 3% based on the type of loan, your military category, whether you’ve used
the loan program before, and whether you decide to make a down payment.
You can, in some cases, roll the funding fee into the loan. You can see a chart
of funding fees here. Loan limits, which vary by county, are listed here.
To access a VA loan, you’ll need a Certificate of Eligibility, which can be
obtained online, by mail, or—perhaps the easiest way—through your lender.
Many lenders are now able to process these electronically in just minutes. If
yours isn’t tapped into the VA system however, it can take several days (longer
if there is a problem with the service member’s record.)
In the end, your research should help you whittle down your options to about
three. Then you can compare the interest rates, as well as other costs imposed
by the lender, which may include:
Closing costs: This is the all-in cost of closing the loan: application fees,
title insurance, attorney’s fees, appraisal charges, credit check fees,
property survey charges, and the cost to prepare the deed and mortgage.
Down payment requirements: As mentioned, the VA Home Loans
program may not require a down payment at all. Other lenders will have
minimum requirements, so compare what they are if money for a down
payment is tight. And keep in mind that if you don’t utilize the VA
program, a lender will charge you PMI if you don’t put down at least 20%.
That cost can add $80 to $100 to your monthly payment.
Loan origination fees: These are charged by your lender to process the
loan and will appear as a percentage of the loan amount.
All of these costs should be presented to you on the U.S. Department of
Housing and Urban Development’s standard Good Faith Estimate (GFE) form,
which will allow you to compare apples to apples.
Finally, don’t be afraid to negotiate. Often lenders will be willing to waive a
fee or lower your interest rate a notch if it means securing your business. And
keep in mind that the GFE will note which line items are flexible and allow the
borrower to shop around for a better deal, like homeowners insurance or
attorney’s fees.
If you’re in your home long enough to see mortgage rates fall, you may want
to consider refinancing your loan. Making that decision is a matter of doing
some refi math, which you can calculate here. There is typically a cost to
refinancing a mortgage. It involves many of the same closing costs and fees
you paid the first time around. To figure out if it makes sense for you, take the
cost of your potential refinance and divide that number by the amount you’ll
save each month by lowering your interest rate. Look at the answer. If you
expect to be in the home more months than that number, it will generally pay
to do the deal. If you expect to be in the home fewer months than that, it
When you refinance, you’ll want to shop around for a rate, just as you did
when you originally purchased your home. And you’ll want to start with your
current lender, particularly if fewer than two years have passed since you took
out your initial loan. Why? Because, since the lender already has paperwork on
you, they may be able to either modify your loan or go through a streamlined
refinance process that is shorter, less cumbersome, and sometimes less
expensive. If they can do either of these, it will result in a lower interest rate
than the rate you have now.
There are a few other instances when you may want to consider a refinance:
You have an ARM, interest rates are heading up, and you plan to stay in
your home. Perhaps you’ve decided to make your latest change of station
a permanent one. Or perhaps you went with an ARM initially for some
other reason. If you expect interest rates to keep moving skyward, locking
down your rate by refinancing into a fixed rate product can make sense.
Your credit score has improved since you applied for your mortgage. A
jump in your score by roughly 100 points has the ability to shave 1% to
2% off your interest rate.
You need cash. This is something to approach very carefully. When
compared with other means of borrowing money, mortgage money
typically comes out looking good: It’s not only cheaper, in most cases,
than credit card debt, student loans, and personal loans, it’s also tax
deductible. That means by borrowing from the equity in your home in
order to pay off credit card debt, for example, you save yourself money in
the end. The problem is that, historically, people who do this have had
trouble keeping their fingers off the plastic. In just a few years, many of
them have charged the credit cards right back up again—and they’ve put
their homes at risk. Only borrow against your mortgage if you know you
can keep your overall debt load moving in the right direction: down. (And
note: The VA Home Loans program also offers a cash-out refinance, which
can allow existing homeowners to tap into their home equity and pay off
debt or make home improvements. You also can use this loan to refinance
a non-VA loan into a VA loan—the VA will guarantee loans up to 100% of
the value of your home. To access this option you will need the same sort
of Certificate of Eligibility required to get a VA loan in the first place.)
As noted earlier in this chapter, a greater percentage of military service
members have troubled mortgages than the population at large. If you’re
facing mortgage difficulties, help is available to you specifically through several
HAMP—Home Affordable Modification Program: This program can
provide a reduction in mortgage payment for people who are struggling with
their current payment. The HAMP program (for the overall population) is for
people who occupy the home as their primary residence, took out their
mortgage before January 1, 2009, and are making mortgage payments that
exceed 31% of their monthly income. Under this program, you can owe up to
$729,750 on your home and must be able to document a financial hardship.
You can either be delinquent on your loan or in danger of becoming delinquent.
Recently, HAMP has been made available specifically for service members
who are struggling with their mortgages because of PCS orders. In order to
qualify, you need to have been living in the home as your primary residence
prior to the orders coming through. This has to be your only single-family
residence, and you have to plan on returning to the home in the future. Among
other criteria, you also need to have sufficient income to support the modified
payment. To request a modification under the program, complete the forms
available here and send the packet to your servicer.
VA guaranteed loans can be modified through the HAMP program. This is
available for service members with above-market interest rates whose
mortgage payments exceed 31% of their monthly income. For more
information, go here.
HARP—Home Affordable Refinance Program: HARP was started in
2009 and is expected to be available through year-end 2015, unless it is
extended. Unlike HAMP, this is for homeowners who are not behind in their
mortgage payments, but have not been able to refinance because the value of
their home has declined. According to the most recent survey of Blue Star
Families, 9% of military homeowners have taken advantage of mortgage relief
programs, and most have utilized HARP. Only mortgages guaranteed by Fannie
Mae or Freddie Mac are eligible for HARP, VA mortgages are not. The value of
your mortgage can’t exceed 125% of the value of your home. You can look to
see if your loan qualifies here. If you are eligible, the first call you make should
be to your lender. If they are not willing or able to help you with a HARP
modification, you can shop around for other lenders.
HAFA—Home Affordable Foreclosure Alternatives Program: HAFA is
designed to help you leave your home behind without having to go through
foreclosure. The program offers two ways out: a deed in lieu of foreclosure,
which allows you transfer ownership of your home back to the mortgage
lender; and a short sale, in which the mortgage company allows you sell the
home for less than you owe on the loan. Homeowners who have mortgages
owned by Fannie Mae or Freddie Mac, and who receive PCS orders, are
automatically eligible for a short sale.
VA Debt Compromise: If you have VA debt (not just mortgage debt but
also education loans or debt due to overpayment of benefits), you can request
a loan compromise. A compromise is similar to debt settlement—where the
lender accepts a lump sum partial payment in lieu of receiving your full
payments over time. Request that compromise by contacting the Department
of Veterans Affairs.
If you’re looking to redo the kitchen or add a bathroom or home office and you
don’t have the funds, the traditional means of borrowing is a home equity loan
or line of credit. These are both second mortgages. What’s the difference?
A home equity loan is a fixed-rate loan in which you borrow money in one
large chunk and then begin paying it back immediately. In order to qualify
you’ll need to have substantial equity in your home; many lenders want to see
the borrower with 20% to 30% equity in their home after the transaction. As
with a mortgage, you should shop around for a home equity loan (big banks,
small banks, credit unions, online lenders, etc.). Interest rates can vary even
more than rates on mortgages themselves. The good news is that there are
next to no closing costs. Loans are typically made for a 10-year term.
A home equity line of credit (HELOC) is a variable-rate loan, often tied to the
prime rate. Similar to variable-rate credit cards, if interest rates rise while you
have money outstanding, the rate on your loan will rise as well. Unlike with a
home equity loan, though, with a line of credit, you apply for and secure a loan
of a particular amount that you draw on only as you need—by check or credit
card. You pay back the money you take out and are charged interest only on
the money you borrow. As with home equity loans, you should shop for the
best interest rates.
Because of their differences, home equity loans and HELOCs are best for
very different purposes. If you need a sum of money all at once—to pay for a
wedding, for example, or a quick redo of the bathroom—borrowing via home
equity loan makes more sense. If you need money over time—to pay for four
years of college, for instance—a HELOC is a better move. HELOCs have one
other important purpose, as a back-pocket emergency cushion. If you have
substantial equity in your home, but limited liquid funds in your bank and
brokerage accounts, applying for a HELOC as a protective measure can be a
smart step. All of which is not to suggest that the equity in your home should
be tapped à la a piggy bank. It shouldn’t. Homeowners who drained the equity
from their homes during the run-up in real estate prices during the last decade
frequently wished they hadn’t. If you are in a rising interest rate environment
and you have an outstanding HELOC, it’s time to consider converting it to a
home equity loan. The interest rate may be higher than that on a HELOC, but if
rate forecasts indicate the rate will go higher over time, you could save over
the long term.
Finally, a note on VA loans: If you want to use VA loan debt to improve your
home, or for the other uses that home equity debt is put to, the way to do it is
with a cash-out refinance, as described above. A streamlined refi (which
doesn’t force you to go through the full refi process) may be available.
Upgrading a home is all about striking a balance—you don’t want to improve
the home too much, because you can end up putting more money into it than
the next seller is willing to pay. Maybe you purchased your house for $200,000
and did $50,000 in renovations, but if every other house on the block is selling
in the $150,000 to $200,000 range, you’re unlikely to recoup all of your
investment (in general, your price should be within 15% to 20% of the
neighborhood average for the best chance to unload the home quickly and
That said, remodeling older features and adding new ones does add value.
Buyers are likely to give a home with an updated kitchen a second look, and if
you’ve ever watched home improvement programs on TV, you know that
things like granite countertops, double bathroom vanities, and gas ranges are
in high demand.
So where will you get the most—and least—bang for your buck? Check out
the chart below:
Best Return on Investment
Entry door replacement (steel)
Deck addition (wood)
Attic bedroom
Garage door replacement
Minor kitchen remodel
Resale Value
Cost Recouped
Worst Return on Investment
Resale Value
Cost Recouped
Home office remodel
Sunroom addition
Bathroom addition
Backup power generator
Master suite addition
Source: Remodeling magazine Cost Vs. Value 2014 (national midrange projects)
Ah, cars. Almost every one of the people interviewed for this book told a
version of the same car story. A young person joins the military—doesn’t
matter which branch—or sometimes, he returns from deployment. He’s not
married (and in most cases it is a he), not tied to an expensive mortgage, not
encumbered with student loans. The paydays, while nowhere near
extravagant, are more money than he’s ever seen. So what does he do? He
goes out and buys an F-150 pickup or some other sweet ride.
Can he afford the payments? Yes and no. He can certainly afford to make
them. But what goes unrecognized is the opportunity cost—the consideration
of what else could be done with that money. It could be saved. It could be
used to pay down credit card debt. Tomorrow is a tough sell to any group of
young people. With military folks, it’s harder still. Why save for tomorrow, the
logic goes, if there’s a chance tomorrow will never come?
So, as we kick off this chapter on cars—which will cover buying vs. leasing,
new vs. used, trading in vs. selling on your own, and a host of other factors—
here’s an acknowledgement that in the military cars are a big deal. Data shows
military personnel age 18 to 35 have two times as many car loans as civilians
of the same age. But here’s also a nudge to try to think rationally about this
purchase. Yes, you need something to drive. But if you can keep your
transportation costs within 15% of your income (and remember that 15% is
not just the car payment, it’s maintenance, gas, etc.), it will enable you to be
freer with the other spending you do in your life.
By far the cheapest way to own a car is to buy it used and drive it into the
ground. That said, many people prefer new. If you’re among those who do,
you’ll need to decide whether to buy or lease. Some of this comes down to
timing on deals. The pendulum swings widely. In 2012, for example, there
were such screaming deals on leases that a quarter of all cars were being
leased, up from 16% a decade earlier. There are other times when the rebates
and 0%-financing offers make purchasing the smarter move.
Leasing and buying also have different pros and cons. If you lease, you get a
new car every few years, potentially lower monthly payments, and you don’t
have to worry about maintenance because your car will always be under
warranty. But you have to worry about mileage caps and taking excellent care
of your car.
If you buy, you build equity. Once your car is paid off, you own it and can
continue to drive it for as long as it holds up. Other benefits include the ability
to drive as much as you want and freedom to wait to repair dents and dings
until you want to. That said, monthly payments might be higher than leasing.
And maintenance costs are on you once the warranty expires.
Your budget, or timing, may dictate which way you go. If you’re still waffling,
ask yourself:
How long do you plan to keep this car? If you will only need it for two
or three years—a time frame more common for service members than
civilians because you may be relocated overseas or to an area that
requires four-wheel drive instead of a sports car—you likely should lease.
But if you anticipate keeping a vehicle for more than four or five years,
financially speaking you’re better off making the investment and buying.
How many miles will you put on the car each year? If you log more
than 15,000 per year, you shouldn’t lease. Mileage charges will add up and
typically make it a bad deal.
How hard are you on your vehicles? If you’re gentle on them, leasing
is still a possibility. If you’re not, when you return a leased car you’ll pay
extra for damages beyond what the leasing company considers normal
wear and tear. That can cost hundreds if not thousands.
If You Decide to Buy
When you buy a car, the price tag (which you’ll likely negotiate, more on that
in a moment) is just one of many factors you’ll need to consider. Depreciation,
insurance, maintenance, financing, fuel efficiency, fees, and taxes are all on
the list as well. So, what’s the best way to approach the transaction?
Do your homework. There are multiple websites where you can find car
prices. But you have to understand which prices you’re looking at. Invoice price
is the price on the bill that the manufacturer sends to the dealer for a car.
Which is not to say that’s the price a dealer pays. There are discounts and
incentives (like dealer cash) that are not included on the invoice. The
destination charge (which is the delivery fee) may or may not be on the
invoice. MSRP, or Manufacturer’s Suggested Retail Price, is the sticker price.
That’s the price before you negotiate. Perhaps the most helpful price is the
True price, which is a snapshot of what people are actually paying for the car
in your area. Websites such as Edmunds.com and Truecar.com both have
extensive pricing information that’s very helpful. When you are asked—and you
will be—how much you’d like to pay for the car, you can turn the question
around and ask: What’s the best you can do? Or you can name a number. Go in
a few hundred dollars below the true car price.
Shop around: Contact, (call, go to, or e-mail), several dealerships and ask
about the same car. Let the dealers know you’re looking for the very best price
on the car and you’re ready to make a deal when you hear it.
Be one-minded: Shop for the car. Don’t throw financing, your trade-in, or
anything else into the mix. (We’ll deal with both financing and trade-ins
momentarily.) Don’t shop around based on your monthly payment. Get the
best, bottom-line price you can on the car. If there are rebates or other
incentives on the table, negotiate for the price first without them, then have
the dealer subtract them.
Time it right: Car dealers have sales goals by the week, but particularly by
the month. Coming in when they’re down to the wire—or during or after a
spate of bad weather that have rendered showrooms empty—can sometimes
result in the best deal.
Ask for the “out-the-door” cost: Dealers tack on a variety of extra
charges. Some, like sales tax, a DMV- or registration fee, and a document fee,
are legit, but others are not. The key to avoiding unnecessary charges is to ask
about them before you sit down to sign a contract. So ask: What’s my out-thedoor cost? What are the additional fees? Do this up front because in many
cases, it’s easier to negotiate a lower price for the car than it is to get fees
removed or reduced.
Get ready to walk: This is why shopping over the Internet and phone is
preferable. It’s easier to keep emotion out of the picture. If you’re in the
showroom, always be willing to leave without having closed the deal.
Finally, make sure you consider the cost to own the car. In many cases,
you’ll find two vehicles that are the same price, but have different costs of
ownership. You want to know how much you’re paying over five years, not
when you’re walking out the door. According to AAA, the average cost to own
and operate a car is 60.8 cents per mile, or $9,122 per year based on 15,000
miles of annual driving. That figure has been rising due not to the cost of
vehicles, but to things like gas, insurance, and tires. A small sedan will cost you
an average of $6,967 per year, while a four-wheel drive SUV will put you at
about $11,599. Pay attention to depreciation as well. If you buy a car for
$20,000 and sell it, or trade it in, three years later for $10,000, it cost you
$10,000 to own that car—not including maintenance and operating costs. If
you were to choose a car that doesn’t depreciate as quickly, it could put $5,000
in your pocket. Edmunds.com and KBB.com have helpful tools to give you a
grip on this factor.
Shop for Financing
Just as shopping for a mortgage is a crucial part of buying a home, shopping
for an auto loan is a key part of buying a car. Unfortunately, in the excitement
of seeing something new and shiny on the showroom floor, it’s often forgotten.
That can add hundreds if not thousands to your cost of owning the same
Before you even contact a showroom, shop around for financing. First, pull
your credit report and score to see where you stand. Then, go online to
Bankrate.com and do a quick search of the auto loan rates in your area.
Finally, get in touch with your bank (or those advertising the lowest rates
online) or your credit union (credit unions have made auto loans their bread
and butter) and apply for financing. If your not-so-great credit score results in
your having to pay above average interest rates, work on your score over the
next 12 to 24 months then apply to refinance your car loan.
The idea is that when you’re negotiating with a dealer, you’ll already have a
good financing option in your back pocket. The dealer may have a low-rate
financing offer that’s better, and that’s fine. But you don’t want to be held
captive to a dealer’s higher rate simply because you want to walk out with a
closed deal.
What to Do with Your Old Car
Trading in your former car where you buy (or lease) your new one is certainly
the easiest thing to do, but it’s likely not the most profitable. To see the
difference, look online to find the difference between the trade-in value (how
much a dealer would pay for a used car) and the private-party price (how much
you typically could get by selling it yourself.)
If you decide to go the trade-in route, there are a few moves you can make
to maximize your take.
Once more, start with doing your research. You want to know what this car
is worth. In addition to your online research, taking the car to three or four
used car dealerships can be worth it. Then, do a little work on your car. Just
small improvements, like paint, can move the price higher when you’re selling
your home, so cleaning (or detailing) the car can help you get the best value
on a trade-in. When the dealer asks what you want for your trade-in, give a
price on the high end of the range and be clear about the fact that you’ve done
enough work to know what’s fair. Finally, be aware you may be able to save on
taxes. In the vast majority of states you are allowed to pay sales tax on the
purchase price of your new car minus the price you’re getting for your trade-in.
That can save you big.
If You Decide to Lease
As I noted, leasing has been more popular in recent years than ever before. If
this is the route you decide to go, here’s what you need to know to get a good
First, decide on the term you want (three years is typical, but if you’ll only
need it for two, you can usually work that out) and how many miles you need
(10,000–12,000 per year is typical, though you often can buy your way up to
15,000). Don’t skimp here; mileage costs more after the fact than if it’s built in
when you make the deal.
Now you can start shopping. Begin online by researching the kind of car—
mid-sized SUV, for example—you’re interested in. Sites like Edmunds.com and
Cars.com maintain lists of the best lease deals currently available. You’re in
the best negotiating position if you can be brand agnostic. If you’re equally
willing to drive a Jeep Grand Cherokee or a Ford Explorer, for instance, you can
play dealers off against each other.
Once you’ve narrowed down your list of vehicles, ask a few dealers in your
area for quotes. You can do this in person or online through the Internet sales
department at many dealerships; in fact, going through Internet sales often
saves you more money because the salespeople are incentivized to move
volumes of cars rather than to make more on each vehicle. (You can still test
drive; just ask your Internet sales rep to schedule it.) Then, push until you
think you’ve come to the lowest number. Often dealers are able to sweeten the
pot with free months. So don’t end the transaction before uttering the phrase:
“Can you do better?”
Make sure you factor in drive-off fees, which you want to keep as low as
possible. Why? Despite the fact that a higher fee will reduce your monthly
payment, if you get into an accident within the first few months and have to
replace the car, that money goes down the drain. And take into account
monthly tax and registration fees as well, which can bump a monthly payment
up $25 to $50.
When you’re ready to close the deal, take the time to read—and understand
—the fine print in your lease. Make sure you know the definition of “excess
wear and tear.” It varies by lender. Car companies tend to be a bit more
lenient than banks and credit unions. But if your document doesn’t spell out the
details, ask to see specific examples of what damage would be considered
excessive and what would not. Then make sure those are noted in your
agreement. (You can attach the examples themselves for good measure.) Also
note what the terms are for breaking the lease. The SCRA gives military
members the ability to do so if they receive orders to PCS or deploy overseas
for period of at least 180 days.
If You Decide to Buy Used
We’ve all heard how much value you lose on a new car just by driving it off the
lot. That’s why used cars, overall, are a much better deal. That said, some
used cars are a much better value than others. Some cars (in particular,
American ones) tend to depreciate rapidly. By buying one that’s a year or two
old, you’ll save a lot. Others (traditionally, imports like Hondas and Toyotas)
hold their value better. That means you’ll pay nearly as much for a recent used
car as you would if you were to buy new. In those cases—because you
generally won’t have as much time left on the warranty—it’s often not worth it.
Cars sold under manufacturer-certified pre-owned car programs (often called
CPOs) are usually great. These programs have gained popularity, largely
because they turn used-car buying into a new-car buying experience. You get
an extended warranty and the peace of mind that the car has been thoroughly
checked by the company’s mechanics. The downside? You’ll pay more for a
certified used car than you would for the same car without certification.
The good news about shopping for a used car is that the process has
become much more transparent in recent years. Thank the Internet for that.
Just as Kayak.com lets you cast a wide net for airfares and Hotels.com does
the same for, yes, hotels, a site called CarGurus.com has made it easier to
scour the market for used cars. You can search for all the, say, 2011 Chevy
Silverados within a 25-mile (or 50- or 100-; more on this in a moment) radius
of your zip code. The site will pull up all the cars it can find—from dealers and
classified ads—with pictures, noting mileage and whether they’re a good,
great, fair, or poor deal. The site even tells you how long a car has been on the
market. And yes, it works just as it does with houses. The longer it’s been
listed, the more leverage you likely have to negotiate.
No matter where you’re shopping, be sure to pay attention to the service
history. If you’re buying a certified used car, it’ll come with the deal (and will
have passed inspection). If not, spring for a month’s subscription to carfax.com
while you’re shopping. Pull the service history on each car before you even go
to see it. It’ll tell you whether a car has a salvage title—which means it was
stolen, flooded, or in a serious accident—and whether the odometer is on the
up and up. If anything raises concern, move on.
Whether you use CarGurus.com or go it alone, a few things will help you nab
the best used-car deals. First, shop in the city not the suburbs. There tends to
be less competition, which means lower prices. Second, cast a wide net.
Expanding your search radius to cover more miles can save you significantly.
And finally, buy in the winter. Used car prices—like gas prices—tend to be
lower then.
The Math
How much car can you afford? I advise spending no more than 15% of your net
monthly income on transportation, including gas, maintenance, and insurance.
Here’s how a few loans stack up:
Loan Amount
Interest Rate Monthly Payment Interest Paid
$40,000 48 months
60 months
$30,000 48 months
60 months
$20,000 48 months
60 months
$15,000 48 months
60 months
$10,000 48 months
60 months
Based on average daily interest rates, Bankrate.com 2/20/14
Saving for the Short Term
How are you at saving money? Don’t worry if you can’t answer this question
with a resounding, “great!” Most people in America are lousy savers—for both
the long-term, which I’ll talk about in the next chapter, and the short-term,
which is what we’re dealing with here.
In fact, saving for the short-term is, in some ways, even trickier than putting
money away for long-term goals. Unlike locking your money up in the Thrift
Savings Plan (TSP) or another retirement plan, there aren’t penalties imposed
for getting your money out, which can make it a little too easy to raid your
That said, learning how to save pays great benefits. In FINRA’s Survey of
Military Financial Capabilities, 45% of respondents who are able to save said
they are satisfied with their personal finances. That’s compared to 23% of
those who are not.
Here are a few suggestions to get you saving successfully:
Copycat your TSP. The military will allow service members to set up a
maximum six allotments directly from your paychecks. Some of these—for
pricey loans, for example—should be avoided. But you can also use the
system to make investments and contribute to the DoD Savings Deposit
program, in other words to build your future. You can also set up a similar
system on your own, by making savings automatic. Nearly every bank will
let you do it nowadays—simply set up automatic funds transfers from your
checking account to your savings account. You can schedule them once a
month, every two weeks, or at whatever frequency you like, but the key is
to schedule them—in advance—so you’re not doing the physical work of
clicking the money over each month. Why is that so important? Because it
takes the option to spend that money instead of save it, off the table.
Bank your partner’s salary. We talked about this briefly in the Budgeting
chapter, but it’s worth mentioning again. The most financially successful
military families I’ve spoken to for this book achieved that status, in part,
because they learned early on to live on their military income and bank
anything extra. Why? Because frequent moves mean you can’t count on a
non-military spouse to keep a job. It may take six, 10, even 12 months for
him or her to find a new position after relocating—and, unfortunately, the
longer you’ve been in the military, the longer it may take, because all of
that geographic jumping around is reflected on a resume, however
unfairly. So when there is additional money coming in, put it in the bank.
The effect will be twofold—you’ll save extra money, of course. But you’ll
also learn to live on a smaller income, which means a move and
subsequent loss of a job won’t be a shock to your budget, causing you to
shortchange your savings or fall into debt.
Focus on the benefits of saving. Short-term, it’s a bit painful—you’re
choosing money in the bank over a new television, upgraded cable
package or weekend getaway. But long-term, saving is key to reducing
financial stress and improving financial happiness. It also means that the
chances are fairly likely that putting away extra money can actually bring
you more satisfaction than buying that new big-screen for the living room.
Boost your return. The Savings Deposit Program offers members of the
military a 10% guaranteed annual return on up to $10,000 in savings (for
the sake of comparison: As I write this, the average savings or money
market account (MMA) is paying just .45%, according to Bankrate.com—in
other words you can get more than 20 times that much!). To qualify, you
must be receiving Hostile Fire Pay while serving in a designated combat
zone for a minimum of 30 consecutive days or at least one day in each of
three consecutive months. You can deposit a total of $10,000 during each
deployment, and your account will be closed (and funds direct routed back
to you) 120 days after leaving the combat zone. For more information
about the program, visit the DoD Savings Deposit Program.
An emergency fund should be your first short-term savings goal, and for good
reason: Emergencies happen. Whether it’s a blown fridge, a pet’s health scare
or sudden car trouble that socks you with a $300 bill, events we don’t plan pop
up (often all too frequently) and cost money nearly every time.
Unfortunately, many people—civilians and members of the military alike—
don’t have any sort of emergency cash cushion. Of the FINRA survey
respondents, 43% do not have emergency funds. Not surprisingly, the higher
the pay grade, the more likely a member of the military is to save for a rainy
day. So, let’s break down how much you need and where you should be
keeping it.
How Much Do You Need?
An emergency cushion should consist of three-to-six months’ worth of fixed
expenses. If you’re a two-income family, three months should be sufficient—
especially if that second-income has been fairly consistent. If you’re living on a
single income (even if your spouse earns some money with part-time work),
aim for six.
That might sound like a lot of money to put away, but let’s be clear about
what we’re talking about here: three-to-six months’ worth of expenses, not
income. And those expenses can be bare bones, because during an emergency
—if you’re living lean due to a major financial hardship—you’re going to forgo
extras. That means the emergency fund should factor in electricity, but not
premium cable. Include enough to cover your mortgage and groceries, but not
eating out or leisure travel.
The way you establish an emergency fund is the same way you save for any
other goal: bit by bit. Unless you can stash away a bonus or other windfall (tax
refunds make excellent emergency fund starters), you’re going to be putting
small amounts in the bank here and there, working your way up to that three-
to-six-month level. Use the tips above to help you get there.
What if you have credit card debt? One of the perks of having an emergency
fund—perhaps the best argument for pulling this pot of money together—is
that it can help keep you out of future credit card debt. Think about it: When a
situation arises, you can use cash, rather than credit cards, to bail you out. But
if you’re already in debt, paying it off comes second on the list. You can,
however, start your emergency fund but not finish it. Then turn to high interest
rate credit card debt, then back to the emergency fund. Why? Because the
payoff on reducing credit card debt is equal to the interest rate you’re paying
on that debt. So you get a greater bang for your buck by focusing on that. Still,
you need to have some emergency cash as insurance against incurring even
more credit card debt. So, I’d go about it as follows:
Emergency fund. Save at least $1,000 here.
High interest rate debt, like credit card debt. Pay this off next.
Finish emergency fund.
Invest for retirement through a Thrift Savings Plan, IRA, 401(k) (perhaps
your spouse has one if you don’t), or some combination of these.
Once you’re saving money, where should you put it? That’s been a fraught
question in recent years as low interest rates kept savings rates lower than
low. It’s also a bit of a Catch-22—to earn what many consider a reasonable
rate of return these days, you have to put your money into the markets and
that means putting it at risk. But short-term savings—and by that I mean
money you may need in five years or less—doesn’t belong at risk.
So what do you do? If this is truly your emergency money, you must opt for
safety over gains. Here are the criteria on which to base your decision:
Interest rate: Yes, you can still earn interest these days. No, It won’t be
much (unless you’re deployed and you can take advantage of the Savings
Deposit Program I mentioned earlier). More about this in a second.
Liquidity: For an emergency fund, you want easy access to your money.
Otherwise, you won’t be able to get at it in an emergency, and that kind of
defeats the purpose. This cash should be in a local bank or an online bank
that comes with a debit card. (For the record, there are situations in which
illiquidity, in other words barricading your money, is your best bet—if
you’re saving for an upcoming vacation, or a new car, and you don’t want
to be tempted to dip into that fund on an impulse buy. In that case, a
more hands-off account, like a CD or online bank without an ATM card can
make sense. A CD, which you’ll invest in for a set period of time, will
penalize you if you try to take the money out earlier. An online bank can
take several days to transfer money into your main account. Both of these
will make you think twice before dipping into your savings—which is
precisely the point.)
FDIC insurance: You want this for your savings. It means that the
money you put in—up to a limit of $250,000 per depositor, per institution
—is insured against loss.
Keeping those criteria in mind, your primary options are banks—either local
or, as I mentioned, online—and credit unions. Your best bet here is to shop
around. I like to use the website Bankrate.com for this—you can search savings
vehicles both online and in your local area. You’ll note that online rates are
often better. But many credit unions and banks cater to members of the
military with higher rates, or have targeted products for service members. So
be sure you’re looking for deals and programs available specifically for you.
Finally, there are some checking (rather than savings) accounts that can pay
you a fairly decent interest rate if you use your ATM card a minimum number
of times per month (usually 10) and pay your bills online (which you likely do
anyway). You can find them at CheckingFinder.com or Kasasa.com. These
products generally have maximum, not minimum, balances—meaning you may
be able to keep up to $25,000 or $35,000 in them but no more. And, they may
be a little too liquid, if you don’t trust yourself to replace the money you have
to debit each month to meet the requirements. But they’re worth a look.
Finally, if you find yourself in a serious bind, there are private, nonprofit
organizations designed to help members of the military who need financial
assistance. Depending on your circumstances, you may be eligible for grants,
interest-free loans, financial counseling or other help. In some cases, loans in
small amounts (generally less than $1,000) may be streamlined for quick
access. The help you’re requesting must be for an emergency situation as
outlined by the organization—often, that includes rent or mortgage payments,
car repairs, utilities, food, medical expenses and other essentials. These
groups cater to specific branches of the military:
Army Emergency Relief (www.aerhq.org): This group provides
financial assistance to soldiers and eligible family members who are on
extended active duty; members of the reserve components of the Army
who are on continuous active duty for more than 30 consecutive days;
soldiers retired from active duty because of longevity or physical disability;
and widows, widowers and orphans of soldiers who died on active duty or
after retirement. The organization may provide an interest-free loan, a
grant, or a combination of the two, depending on your circumstances.
Navy-Marine Corps Relief Society (www.nmcrs.org): Those eligible
are active duty or retired sailors or marines; eligible family members with
military ID cards; surviving spouses; and reservists on active duty of 30
days or more. The group provides financial counseling—including help
budgeting—education assistance, loans and grants.
Air Force Aid Society (www.afas.org): Both active duty and retired Air
Force personnel and their eligible family members may be eligible for
assistance from the AFAS, in addition to Air National Guard or Air Force
Reserve personnel on extended active duty for 15 days or more. Spouses
and dependent-age children of deceased Air Force personnel may also
qualify. The organization provides emergency assistance loans and grants,
education assistance and other community programs.
Coast Guard Mutual Assistance (www.cgmahq.org): Both active
duty and retired members and their immediate family are eligible, as are
some civilian employees, reserve members, and auxiliary members. The
group provides a variety of assistance, including interest-free loans,
grants, referrals, and counseling services.
Investing for Tomorrow
What’s the biggest financial fear going? These days, for many people, it’s the
thought of not having enough money to get you through what might be a
lengthy retirement. In part that stems from the fact that we’re living so much
longer than prior generations did. In part it’s a result of uncertainty over Social
Security. But the best way—in fact, the only way—to deal with it is by diving in
and assessing your own retirement prognosis.
Many members of the military are fortunate in having the opportunity to
retire twice—once from a military career and then again from a civilian career.
The possibility of two streams of retirement income doesn’t mean you’re off
the hook as far as the planning process—or the importance of saving—goes,
however. Here is what you need to know about military retirement pay, civilian
retirement pay and Social Security, and how to make the most of all of them to
insure a comfortable retirement.
Pension plans have become incredibly scarce in corporate America. Thankfully,
that’s not true of the military. There are three pension plans (though one has
been largely phased out) for those who have served 20 years or more, and
others for reservists and those who have retired due to disability:
If you entered service before September 8, 1980, your retirement system
is Final Pay. You receive a pension calculated as 50% of the average of
your final pay. For every year over 20 served, you receive an added 2.5%.
So, if you serve 21 years, your pension will be calculated as 52.5% of your
top three years, if you serve 30 years, it will be calculated as 75% of your
top three and so on. Only base pay—not allowances—are factored into
these calculations. But you will receive annual cost of living adjustments in
line with growth in the Consumer Price Index (CPI) to help you keep pace
with inflation.
If you entered service after September 8, 1980, after 20 years of service
you become eligible for the High-3 retirement system. Service
members receive a pension calculated as 50% of the average of their top
three years of base pay. For every year over 20 served, you receive an
added 2.5%. So, if you serve 21 years, your pension will be calculated as
52.5% of your top three years, if you serve 30 years, it will be calculated
as 75% of your top three and so on. Again, only base pay—not allowances
—are factored into these calculations. But you will receive annual cost of
living adjustments in line with growth in the Consumer Price Index (CPI) to
help you keep pace with inflation.
The one choice you have to make concerns REDUX retirement. At 15
years of service, today’s service members are offered a $30,000 bonus for
entering the REDUX retirement plan instead of the High-3. This cuts the
percentage of your pay on which your pension will be calculated at 20
years from 50% of your base pay to 40% of your base pay. That can be
tempting—particularly if you have high interest rate credit card debt to pay
off or some other looming obligation. But it’s not typically a good deal. The
$30,000 you put in your pocket will likely be significantly less than the
bigger pension checks you’d pull in over time. Moreover, cost of living
adjustments under REDUX are lower at CPI minus 1% each year.
Retirement benefits from the reserves and National Guard, also called
non-regular retirement, are available for reservists who accumulate 20plus years of qualifying service, typically at age 60. Benefits are available
earlier to those members who deploy for war or a national emergency.
Qualifying years are those in which a service member earns at least 50
retirement points. There is no REDUX retirement plan, but the High-3 and
Final Pay plans are both available. But note: High 3 reserve component
retirees must transfer to the retired reserve in order to receive COLA
adjustments (in other words, to have their retirement pay calculated at
time of retirement). Not doing this means retirement benefits are frozen at
the time of separation, which could mean missing out on a couple of
decades of COLAs.
Disability retirement, also called Chapter 61 retirement, is available for
members of the military who have been determined to be unfit for duty
with a disability as rated by the military service of 30% or greater.
Disability retirement may be temporary for up to five years, at which point
it will be reevaluated. If your disability is combat-related, your retirement
pay will not be taxed. How is disability retirement calculated? Your base
pay (either your final pay, if you entered the service before September 8,
1980, or the average of your highest three years of pay) will be multiplied
by either your percentage of disability or your credible years of service
times 2.5% (your choice). In either case, the minimum percentage for
temporary disability retirees will equal 50%.
Another important item on the military retirement menu is the Thrift Savings
Plan (TSP). It was originally available to civilian employees of the federal
government but was made available to members of the military in 2001. The
TSP, in which you can participate in addition to any pension you’ll receive down
the road, works much like a 401(k) plan. You make pre-tax contributions to a
retirement account for your own benefit and the money in that account grows,
tax-deferred, until you withdraw it. If you wait to withdraw until after you
reach age 59½, you’ll pay income taxes on withdrawals but no penalties. If
you withdraw prior to that age, you’ll face a 10% penalty as well. Mandatory
withdrawals must begin by age 70½. There is now also a Roth version of the
TSP with Roth tax treatment. Contributions are made with money that has
already been taxed. Then the money grows, tax-free, forever. There are no
additional taxes owed upon withdrawal. In addition, you’re allowed to
withdraw your contributions at any time. If and when you separate from the
military, your TSP can be rolled into an IRA or you can roll the funds into
another employer-sponsored plan like a 401(k).
Is it worth contributing to the TSP? The answer is, absolutely. And the
younger you do it, the better.
Look at this example of two 25-year-olds, Jane and Bob. Jane starts
investing $100 a month at age 25 and continues investing that same amount
until she retires at 65. Bob, on the other hand, puts off saving for retirement
until he’s 40, at which point, he starts investing $350 a month for the next 25
total contributed by age . . .
$48,000 $105,000
Total Contribution
$48,000 $105,000
Total Value of Retirement Account $351,428 $335,079
Based on an 8% return on investment
You’re not seeing things. Bob contributes twice as much as Jane, but ends up
with less money for retirement. That’s the power of compound interest: Jane’s
investments are boosted by the time they have to grow.
If you contribute to the TSP, you’ll have to decide how to invest the money.
Unlike putting your money into an IRA at a big brokerage firm, you have a
limited menu of options. These include:
The G Fund, which is invested in a U.S. Treasury security that is
guaranteed by the U.S. Government. The G Fund, which over the past five
years has returned an average 2.3% annually, will not lose money.
The F, C, S, and I Funds, which are index funds currently invested by
BlackRock Securities, a firm that has been contracted to do so. The F Fund
is a fixed-income fund that tracks the Barclay’s Capital U.S. Aggregate
Bond Index, which is invested in U.S. Government, mortgage-backed,
corporate and foreign government bonds. The C Fund is a common-stock
fund that mirrors the S&P 500 Index, a basket of 500 large- and mediumsized U.S. companies. The S Fund is a small-cap fund invested to mirror
the Dow Jones U.S. Completion Total Stock Market Index, a basket of
small- and medium-sized companies not included in the S&P 500. The I
Fund is an international index fund that tracks the Morgan Stanley Capital
International EAFE (Europe, Australasia, Far East) Index. It is invested
mainly in large companies from 22 developed countries.
The L Funds are five life-cycle funds. These are a pre-mixed portfolio of
the five available core investments invested to take a diminishing amount
of risk as you age, so that as you get closer to retirement you have a less
aggressive mix of assets in your portfolio. The L 2050 fund is for people
who need their money in the year 2045 or later. L 2040 is for those who
need their money between 2035 and 2044. L 2030 is for people who need
their money between 2025 and 2034. L 2020 is for those who will need
their money between 2015 and 2024. If you will need your money next
year or already drawing income, the L Income is the fund for you.
How do you make a decision about which fund (or funds) to invest in? First,
think about whether you want to build an asset allocation strategy on your
own. In general, you want to take more risk with your money at a younger age
—less as you get closer to retirement (or, in fact, to any goal). You also want
to make sure you’re diversified. That means having your bases covered when it
comes to exposure to not just stocks and bonds, but different types of stocks
(international, domestic, large cap, small cap, etc.) and bonds (corporate,
government, etc.). If you are not confident in your ability to put together such
a portfolio, picking the right L Fund for your age is a one-size-fits-all solution.
You can see a snapshot of the funds’ recent investment returns here.
When you leave the military, you have to make a decision about what to do
with your TSP. You have four options:
Leave the money where it is in your TSP account: This is easy—
there’s nothing to do—and low cost: The fees associated with the TSP are
often much lower than other 401(k) plans and IRAs. But note, you can’t
contribute to this account or borrow from it once you’ve left the service
(although you can roll other 401(k) or other retirement accounts into it,
which can be a good strategy for maintaining low expenses). And over the
long term, as you open accounts with other employers or on your own,
having multiple statements to go through can be an administrative
headache. If you’re not sure of your plans—or aren’t sure you’d mind
multiple statements—it’s fine to leave it for now and make the rollover
down the road.
Roll the money into an IRA: The big benefit of an IRA over the TSP is
options—loads and loads of investment options. If you’ve wanted to put
the money into individual stocks or mutual funds to which you didn’t have
access before, now’s your chance. Unlike a TSP account though, you can’t
borrow money from an IRA. And, if you’ll have a 401(k) from a new civilian
job as well, the IRA doesn’t solve the multiple-account problem. The key is
to roll the money directly from your TSP into an IRA. If you withdraw the
assets and you’re not 59½, you’ll face a 10% early withdrawal penalty.
(Even if you change your mind and later decide to roll over, you’ll have to
come up with the 20% that was mandatorily withheld.) You’ll need a
specific form—TSP-70—to accomplish this. Many companies will also help
you do the paperwork and initiate the transfer with your signature.
Roll the money into the 401(k) plan at your new job: This is a wise
move as long as you like the investment options on the menu in your
company’s 401(k)—and the fees are reasonable. Rolling over directly
means you won’t suffer the early withdrawal penalty. Having all of your
retirement accounts in one place can also make managing your money
easier. And it makes borrowing from your account a possibility.
Withdraw the money: Doing this is almost always a huge mistake.
You’ll face taxes and early withdrawal penalties that can eat up 30 cents
on the dollar if not more. If you desperately need the money, look for
other solutions before you resort to this one.
Windfalls are a terrific way to take whatever you’ve put away for retirement
and supercharge it. It’s akin to winning the lottery—an opportunity that many
winners (as you know if you read the tabloids) blow by spending the big check
that comes your way. But with a little planning you don’t have to.
The lowdown on military bonuses is available at Military.com. Bonuses range
from a few thousand dollars for enlisting to do a job for which there are many
candidates to nearly six-figures for re-enlisting for a number of years to take on
a harder-to-fill task.
How best to handle a large sum of money that may very well be burning a
hole in your pocket (or screaming at you: Take me on vacation?) Allocate a
percentage of it for spending: 5% of a large bonuses, perhaps, 10% of a
smaller one. Then put the remainder to work by socking more away in your
retirement accounts. Receiving a windfall is also a good time to get some
financial advice. If you haven’t worked with a financial professional to build a
plan for your future, there are few investments with a larger payoff than a few
hours of targeted financial advice.
Your bank or brokerage firm will typically offer a financial advisor (often right
in the branch) willing to talk to you about your options. Most financial advisors
will also offer a free complimentary first session to help you get started
(although there will be a fee for services after that.) Here are several places
you can go to find a financial advisor who is a good fit for you. All have zip
code locators that can help you find people to work with in your area.
The Financial Planning Association (fpanet.org): The largest
association of financial advisors in the US. FPA members are paid in
different ways: some on commission, some by a fee for planning services,
some take a percentage of assets under management. Your goal should
be to get a sense of how much this relationship will cost per year.
The National Association of Personal Financial Advisors
(napfa.org): An association of planners who are paid on a fee-only basis.
The Garrett Planning Network (garrettplanningnetwork.com): A
group of fee-only financial advisors who are willing to charge by the hour.
If you are looking to dip your toe in the water and assess whether what
you’re doing yourself has put you on the right track, this is a good place to
Civilian Retirement
Most people retiring from the military after 20 years or more transition into
another job or career and build up a civilian retirement stash that they can tap
when they actually retire (i.e., stop working), typically sometime in their 60s.
Civilian life—and civilian work—doesn’t have a systematic approach to
retirement, à la the military. Although some companies and industries continue
to have pensions, many have dropped them because of the high cost. Most
people use a variety of different accounts with preferential tax treatment to
amass money for retirement. It’s your job to both put the money in and decide
how it’s invested. Here’s a way forward:
Start by picking your buckets: The first question you have to answer is,
“Where do I put the money?” These accounts allow you to contribute money,
generally before you pay taxes on it (the Roth IRA is an exception to this rule),
and then grow it tax-deferred (or tax-free in the Roth case) until you withdraw
the funds at retirement. Does your employer offer a 401(k) or 403(b) or 457
plan? If so, these are some of the best tools available for retirement saving. In
2014, you can contribute up to $17,500 (plus another $5,500 if you’re over 50
years old). And unlike the military TSP, which does not offer matching
contributions, many companies do . . . take advantage!
If your company doesn’t offer a 401(k) or similar program, an IRA will be
your best bet. An IRA, or individual retirement account, is an account that you
establish on your own to save for retirement. The contribution limits are a little
lower at $5,500 (plus another $1,000 for those over 50), but depending on
your income and what kind of IRA you choose, they may be tax deductible.
Here are your IRA options:
Traditional Deductible: A Traditional IRA is available for anyone under
age 70½ with earned income. For individuals who are also covered under
an employer-sponsored retirement plan, contributions are tax deductible
up to incomes of $60,000—$70,000 for singles or heads of households,
$96,000—$116,000 for for married couples filing jointly in which the
spouse who makes the contribution is covered by a workplace retirement
plan. For an IRA contributor who is not covered by a workplace retirement
plan and is married to someone who is covered, the deduction is phased
out if the couple’s income is between $181,000 and $191,000. For
individuals who are not covered under an employer sponsored retirement
plan there is no income phase out. Once you make the contribution, the
money grows tax-deferred until you withdraw it at retirement. At that time
it will be taxed at your current income tax rate.
Traditional Nondeductible IRA: If you are above the income limits, you
can still contribute to an IRA, you just can’t deduct your contributions. The
money will grow tax-deferred until you withdraw it and pay the taxes at
Roth IRA: To be eligible to contribute to a Roth, your modified adjusted
gross income can’t exceed $114,000—$129,000 for singles and head of
households, $181,000—$191,000 for married couples. Other differences?
Your contributions to the account won’t be tax deductible, but your money
grows tax-free; when you pull it out in retirement, you won’t have to pay
taxes on it. You are not forced, as you are with a Traditional IRA, to make
withdrawals ever, which means you can pass this money on to your heirs.
And you can make preretirement withdrawals for education and for your
first house as long as the money has been in the account for five years
without penalty. You can also pull out your contributions, but not your
earnings, at anytime, penalty-free.
Spousal IRA: As a non-earning spouse, you can save money in your own
IRA as long as you and your spouse file a joint tax return and his or her
income is at least as much as your contribution. The contribution limits are
equal to those for other IRAs, and your spousal IRA can take the form of a
Traditional IRA or a Roth as long as you don’t run afoul of the income
QUESTION: Which is better, a Roth IRA or Traditional?
ANSWER: Generally speaking, if you’re eligible for the Roth, that’s going to
be your best bet, particularly if you’re under 50. You’ll lose the tax deduction,
sure, but the advantages are greater in the big picture. Going forward, we
don’t know what tax rates will be, but we know what they are now and it’s a
safe bet that they won’t go any lower. That means it makes sense to get your
money in a tax-free account if you can.
There are also a number of small business retirement plans. One of the
nicest things about working for yourself is that you have the ability to stash
away even more tax-advantaged dollars for retirement. Plans include:
The SIMPLE (or Savings Incentive Match Plan for Employees), which is best
for businesses that have 100 employees or fewer. It’s easy to set up and
cheap to administer. Employees can contribute up to $12,000 for 2014
(plus $2,500 if you’re 50-plus). Employers are required to contribute.
The SEP IRA, or Simplified Employee Pension, which is best for businesses
with just a couple of employees (preferably just you or you and other
family members), as employers make all the contributions. Setup and
administration are easy and contribution limits are high: The lesser of
$51,000 or 20% of net earnings from self employment. And the Solo
401(k), which allows you to contribute for yourself as employee, then lets
your company contribute up to 20% of your total earnings as your
employer (you can do the same for your spouse.) In other words, it’s a
good way to stash a lot of loot tax-deferred. On the downside, it’s a little
more complicated than the other options.
Fund them automatically: Now that your buckets are established, you
need to start funding them. In my book (and therefore, in this one), there is
only one way to fund retirement accounts: automatically. If you are putting
money into a 401(k) or other employer-based retirement account, that means
doing your funding through automatic paycheck withdrawals. If you’re not,
however, you need to set this automation up yourself. Call the bank or
brokerage firm that houses your IRA, Roth or SEP—or visit it online—and ask to
have a certain amount of money transferred automatically to the retirement
account every month. You only have to do this once, and it will continue to
happen until you stop it (which you shouldn’t). The miracle is how fast your
savings add up.
Try to contribute the max: That may seem obvious, but many people
don’t do it. Try, at the very least, to grab all of the matching dollars you’re
offered—that’s free money. If you can’t get to that level immediately, start
where you can and then ratchet up your contributions by 2% every year and/or
every time you get a raise. Why 2%? It’s the amount research has shown we
can increase our contributions without noticing it.
Diversify . . . or invest so you don’t have to: As I noted in the section on
the TSP, once your money is saved you have to put it to work.
You’ve heard not to put all your eggs in one basket, and that’s what an asset
allocation aims to avoid. If you invest all of your money in stocks, and the
stock market takes a major dive, your entire nest egg is at risk. Ditto with
bonds. And if you put all the money in cash, you’ll no doubt lose money after
taxes and inflation. That’s a risk, too. But if, on the other hand, you have a mix
of stocks, bonds and cash, you’ll be protecting yourself against exactly that
Figuring out your asset allocation means figuring out what mix of assets is
right for you. A typical asset allocation includes stocks for long-term growth,
bonds for income and security, and cash for short-term needs. You can get
every one of these components in mutual funds, index funds or Exchange
Traded Funds (which are stocks that mirror index funds), as well. Let’s run
through each of these components briefly.
Stocks, or equities, are shares in public companies that trade on a stock
exchange. They are the highest risk investments, but have also historically
provided the highest returns. Money invested for the long-term (10 or
more years) generally belongs in stocks because you want to be able to
maximize your ability to pull in those bigger returns while still having time
on your side in case you need to recover from losses.
Bonds allow you to buy up the debt of a company or government agency
for a set period of time and interest rate. Picture yourself as a lender, and
the money you earn on that bond is the interest paid to you for allowing
that company to borrow your money. If interest rates go up, making it
more expensive to borrow money, you can sell your bond at a higher price.
If they go down, the bond will become less valuable—not the time to sell.
But if you hold on to it until the maturity date, you’ll get your money back,
plus interest. That makes bonds less of a risk than stocks, but they also
aren’t as lucrative.
Cash investments, like money market funds and CDs, are the safest
investments because they aren’t subject to outside risks (other than the
aforementioned taxes or inflation). You won’t earn a great deal in interest,
but you won’t lose principal, either.
When you create an asset allocation plan, you’re finding a mix of different
ingredients that, when pieced together, can help you get the maximum return
on your investment with the appropriate amount of risk. In general, the
younger you are, the more you should have invested in stocks. Investors
nearing retirement age should have more in bonds and cash for safekeeping.
After you’ve allocated your assets, your work isn’t done, unfortunately.
Within your asset classes, you need to make sure you’re diversified. That
means you have a mix: different kinds of stocks (U.S.-based companies,
international companies, small companies, large companies, and companies in
varied industries) and a few different kinds of bonds (U.S. Treasuries, inflation
protected, corporate). This keeps your risk at a minimum, because if any entire
industry goes up in smoke—the auto industry, for example—you won’t be all in.
One of the easiest (and one of the cheapest) ways to diversify is to put your
money into index funds, which invest in a plethora of stocks and bonds in one
swoop. You might buy a domestic total stock market index fund, a total bond
market index fund, and a global stock fund. How much of your money goes into
each goes back to your asset allocation: If you’re 40, you’d probably want 50%
of your money in the domestic stock fund, 40% in the bond fund, and 10% in
the international fund.
If the idea of having to rebalance each year turns you off, you should
consider what’s called a lifestyle or target-date retirement fund (which we
talked about as options in the TSP). These funds do the dirty work for you:
You’ll select an initial objective for the money—typically the number of years
you have until retirement—and then the fund will put your asset allocation on
autopilot, and adjust it automatically as you age.
Social Security
Finally, there’s your other pension: Social Security. If you served in the military
anytime after 1956, you paid the Social Security taxes, just like civilians do. In
fact, if you served between 1957 and 2001, you’ll receive extra credits (they
attach to the earnings averaged over your working life, not to your monthly
benefit amount—many people aren’t aware of this, these credits must be
claimed at the Social Security office). That said, the most important thing to
keep in mind about Social Security is that we’re talking about a lot of potential
money flowing your way—and many people don’t get as much as they could
because they apply for benefits too soon. Here are a few tips to get it right:
If you’re single and expecting to have a normal life expectancy: Delay
applying for benefits until age 70. Perhaps your military pension can tide
you over—or you’ll have income from other sources like a 401(k). Delaying
allows Social Security benefits to grow by 8% a year, guaranteed.
If you’re married and one spouse earns significantly more than the other
(or the second spouse doesn’t earn at all): Maximize the higher earner’s
Social Security to the greatest degree possible. That way, if the higher
earner passes away, the surviving spouse gets 100% of whatever that
person was getting. This can add up late in life when other assets may run
If you’re married with two high earners relatively close in age: The higher
earner should file for benefits but not take them immediately—a strategy
called file and suspend. The lower earner draws spouse payments. And the
couple uses that money to bridge them until age 70.
None of these creative strategies work until you reach age 66. You have to
be full-retirement age to start suspending, delaying, etc. If you have to tap
your benefits before then, you’re out of luck.
And finally, 80 is the magic age. Tapping Social Security early means
more, smaller payouts over your lifetime. Waiting means fewer, bigger
ones. If you’re single, you have to live past 80 for waiting until age 70 to
make sense. If you’re a couple, as long as you believe one of you will live
past 80, you want the higher earner to delay as long as possible.
How Much Do You Need for Retirement?
This is (often literally) the million-dollar question. The best way to come up
with the right answer for you is to use a retirement calculator. This is a
computer program that will ask you questions like how much you have saved,
how much you’re earning on those savings, how long you plan to work, how
much you’re anticipating receiving from Social Security and other pensions,
how much of your preretirement income you want to have in retirement and
how long you think you’ll live. Then it’ll spit out a number you should be saving
on a monthly basis.
Using these calculators isn’t difficult—the one on T. Rowe Price is both free
and easy, but a lot of people don’t want to know the answer, so they avoid
running the numbers. If you’re among them, and nothing I can say will get you
to sit down and do it, the folks at Aon Hewitt, a large benefits consulting firm,
recently published an analysis that says you should have 11-times your final
salary banked if you want to retire at age 65, and 9.4-times if you’re willing to
wait until age 67. These numbers are in addition to Social Security, but not
pensions. So if you have a pension (military or otherwise), you can assume you
don’t need quite that much.
If you’re not even in the ballpark—and many people aren’t—here are a few
more ways to make up for lost time:
Work a little longer: Putting in a few more years of nine-to-fives can
have a huge effect on the balance in your retirement fund. If you can
delay Social Security as well, you’ll be even better off.
Plan to pick up a part-time job: You might find that once you’re
retired, having all that time on your hands isn’t all it was cracked up to be.
If that’s the case—or you need some extra cash—why not find some parttime work you enjoy? Look for something you’ve always wanted to do, so
it’s more hobby and less chore.
Scale back: Maybe your dream is to travel a few times a year once
you’ve left the workforce, but instead you limit yourself to twice a year to
save a little extra cash. You can still do the things you want to do, just do
them less frequently or find other ways to loosen up your budget.
Bank your windfalls: The average tax refund has been more than
$2,000 a year. If you plopped that money into an IRA every year, it would
go a long way to supplementing your retirement. Ditto your holiday
bonuses, birthday checks, or the money you free up when you pay off your
car and have an extra $300 or $400 a month.
Protecting Your Family
The military teaches us to prepare for all scenarios no matter how difficult.
Planning for death or injury during service is difficult—there is no doubt about
that. But the situations your family will face if you haven’t done the planning
can leave them in an even more difficult position. So, in this chapter, we’ll
explore the steps you should be taking—and the benefits available to your
family should you become injured or die in the course of your service.
The good news is that Uncle Sam will help you, both by providing some
(though occasionally minimal) insurance coverage as part of your benefits
package, and by offering free legal assistance that you can use to create a
comprehensive estate plan.
This legal assistance comes in the form of military lawyers, also known as
Judge Advocates (JAGs). They are bona fide attorneys, located on nearly every
base, and their services are generally available to all active-duty members of
the military, as well as retirees, reservists and dependents. I encourage you to
take advantage of them throughout this process—as a civilian, drafting a
comprehensive estate plan with a lawyer can cost around $1,000. You can find
your closest legal assistance office here.
One question I get asked often is who should have a will. The answer is easy:
everyone. People tend to think that wills—and estate plans in general—are for
high-net-worth individuals. That’s simply not the case. A will serves several
important purposes:
It stipulates how you’d like your assets to be divided up. Essentially, it is
speaking for you when you aren’t there to speak for yourself.
It names guardians. This primary responsibility goes with being a parent.
Unfortunately, too many parents punt.
It allows your family to avoid a painful, drawn-out process that may
involve the state making decisions you could have easily made.
Creating a will isn’t complicated or scary, particularly when you have military
legal assistance on your side. If your situation is fairly standard—you’re single
and want to pass assets to your parents or other family members; you’re
married and want to pass assets to your spouse; you’re married with children
and want to pass assets to your spouse and then your children in equal shares
—you and a JAG attorney can whip up a will fairly simply. (If you’d prefer to do
it on your own, you can do that, too. Nolo.com has a program called WillMaker
Plus that can walk you through the process, or you can use a website like
Keep in mind, though, that not everything you own will be covered under
your will. There are certain assets that, despite what your will says, will be left
to the beneficiary you’ve designated on the account paperwork. Primarily:
Life insurance policies: A life insurance policy will ask you to name a
beneficiary, and that person (or persons) will receive the proceeds of the
policy if you pass away, despite what your will dictates.
Retirement accounts: Retirement accounts, like your Thrift Savings Plan
or an IRA, go to the beneficiary you name—overriding your will. If you
name someone other than your spouse, your spouse has to declaim these
assets in writing.
Property owned jointly: If you own property—like a house or bank
account—with a spouse, partner or another family member, it will
automatically go to the survivor.
All of these exceptions argue for keeping both your will and your paperwork
regularly updated. That way you don’t run the risk of life insurance proceeds
going to an ex-spouse, for instance. Make sure you revisit your estate plan
after the following major life changes:
Death of an heir or beneficiary
Birth of a child
When your children are no longer minors
When a designated guardian, executor or trustee is no longer able to
After the purchase or sale of a business
After major changes to the value of your estate
If your preferences have changed
Your will is the only document that allows you to name guardians for minor
children should something happen to you. Absent a will, the decision is often
made by a court, which can turn into a long, drawn-out legal battle, and a
painful experience for your children.
You may have already confronted these issues, particularly if you’re a single
parent who has been deployed—maybe your children were cared for by
grandparents or other relatives in your absence. That person may be the right
person for the job long-term, too, if the unthinkable happens. But if you’re not
clear on whom you’d choose, I find it’s helpful to start by making a list of
possible options. The goal is to whittle that list down to one person, which
means you want to avoid naming a couple, at least formally. Why? Divorce. If
you want to leave your children in the care of your brother, and you name your
brother and his wife as the guardians, the custody of your children could go to
either of them. In some cases, that may be fine—you may be comfortable with
a former in-law raising your children. But more likely, you intended for your
brother to be the guardian, so you’ll want to solely list his name in your will.
Once you’ve made a reasonable list of names, ask yourself the following six
questions about each person:
Does this person have the time to take care of my children?
Does he or she share my values?
Is this person young enough, and in good enough health, to take on this
challenging and lengthy task?
Is the person geographically desirable, or would the person—or my
children—be required to move?
Does he or she have the resources necessary (or will I be leaving enough
in life insurance or other resources so that’s not an issue)?
Is he or she willing to do it?
A living will is a document that outlines your preferences in a dire medical
situation. It answers questions of whether you would want life-sustaining
treatments—things like CPR, feeding support, dialysis, ventilation—if you were
in a coma, suffered brain damage, experienced severe pain or other scenarios.
Most states have approved living will forms; if you split time between two
states—say you have your residence in one but you’re stationed elsewhere—
you may need to fill out a living will for each. You can generally find your
state’s standard document on the website of the state bar association. But the
VA also has a form you can fill out, available here. It will take you through a
series of questions that will help you outline your preferences, and includes
room for you to make comments and notes to clarify information. You’ll need
to have two witnesses sign the document; that makes it valid in VA facilities.
In order for it to be valid outside of the VA, you’ll need to have it notarized.
Military installations often have a notary on staff.
Within this particular form, you’ll also be able to name a durable power of
attorney for health care. This is the person you’ve designated to make medical
decisions on your behalf. Why aren’t the preferences you outlined on your
living will enough? In many cases, they will be. But if your treatment falls into
a gray area, not covered by the living will, this person will have the legal right
to make decisions for you when you’re unable to make them and relay those
decisions to your medical team. For this reason, it’s key that this person–who is
typically a spouse, but can be a parent, other family member or a friend—be
aware of what you want. Sit down with the person you’ve given this power and
talk through various scenarios. No, it’s not a fun conversation. But it is a
necessary one.
And note: If you are not using the VA form, you may need a separate living
will and durable power of attorney for health care (also called a health-care
proxy). Make sure that you have both.
Just as you must give someone the ability to make health-care decisions on
your behalf, you need to give someone the ability to manage your finances if
you’re unable to do it for yourself. You can name the same person to both roles
if you’d like—many people do.
If you’ve deployed before, you may already have an arrangement like this in
place. Service members are often encouraged to appoint a power of attorney
for finances prior to deploying because that person can then handle your affairs
in your absence—pay your bills, file your taxes (although you get an automatic
extension when deployed overseas) and even request emergency financial
relief services. Again, if you are married, you’re likely to appoint your spouse.
Single people can appoint a trusted friend, parent, other family member or
even a lawyer or accountant.
The difference between a power of attorney and a durable power of attorney
is that the latter can continue to act on your behalf if you are debilitated—
mentally or physically unable to take care of these issues on your own. A
general power of attorney is designated to the role for a specific period of time
—for instance, only while you are deployed.
You can also limit the authority of your power of attorney by naming specific
situations in which they are authorized to represent you. (In fact, military
leaders often recommend avoiding a General Power of Attorney when possible,
because it gives so much power to the person named on the POA.) A JAG
attorney can help you prepare a power of attorney document fairly quickly, or
you can use a free template, like the one from RocketLawyer.com. Make sure
you use the correct document for your state.
Trusts are often mistakenly considered tools for the wealthy. In fact, they can
be useful to anyone who has strong feelings about how and when they want
their assets to be distributed when they pass away.
Many estate-planning attorneys actually recommend putting your assets in
trust so that you can distribute them with strings attached. For example, you
can stipulate that your children won’t have access to the money you leave
them until they are 25, or that the money will be distributed in chunks—
commonly one-third at 25, one-third at 30 and one-third at 35. Both strategies
help reduce the chances that your children will inherit before they’re old
enough to use the money wisely. You might also put stipulations in place that
stop distributions in the event of a drug or alcohol problem.
There are many different kinds of trusts, but the most common, and the one
you’re likely to want, is a revocable living trust. It can be set up within your will
to distribute assets to your heirs the way you wish, while remaining under your
control while you are alive. That means you can continue to draw income from
it, access the principal or make changes to the beneficiary. You can also fund
the trust with your life insurance policy, by naming the trust as the policy’s
beneficiary. If you’re thinking about trusts, you need the help of an estateplanning attorney. For many people, a will, along with the durable powers of
attorney and a living will, are sufficient.
Life insurance is a must for anyone who has someone—or someones—
depending on their income. That means you need life insurance if:
You are married or in a partnership and your family depends on your
income or your services.
You have children.
You have elderly parents or others you support.
Importantly, this often means that both spouses should be insured. The
primary breadwinner is typically thought of. But what if a stay-at-home
spouse cares for the children during and manages the household? If
something were to happen to that person, would there be a cost to
replace their services—and would that cost be unaffordable under the
earning power of the primary wage earner? If so, there should be a life
insurance policy on that person as well (and both of you should fill out the
worksheet that follows to figure out how big a policy you each need.)
In the most recent Blue Star Families report, 74% of respondents
participated in the Servicemembers Group Life Insurance (SGLI) program
offered through the Department of Defense. For that high figure, we can likely
thank the fact that the program enrolls eligible service members automatically
if they qualify—there is no need to apply. Active-duty members of the Army, Air
Force, Navy, Marines and Coast Guard are among those who qualify, as are
members of the Ready Reserve or National Guard who are scheduled to
perform at least 12 periods of inactive training per year.
For the coverage, you’ll have a monthly premium automatically deducted
from your pay. The premium is currently 6.5 cents for every $1,000 of
This life insurance plan offers coverage of up to $400,000 (you’ll purchase it
in $50,000 increments and pay $27 a month—$26 plus $1 for TGSLI—a very
good deal). It will stay in place for up to 120 days after your date of separation
from the military (if you are totally disabled at separation, coverage may be
extended for up to two years).
More than half of the participants in the Blue Star survey don’t carry
additional life insurance. That begs the question: How much life insurance do
you need?
It’s a hard number to pin down, but I’ll tell you that, in many cases, it will be
more than $400,000. To find your figure, look at your current income, and
compare that to how much your dependents will need to replace at your death.
Factor in how many years they’d need to replace that income, and whether
you’d want your death benefit to pay for college, pay off the mortgage, or
create an inheritance.
Sound a bit overwhelming? You’ll be happy to hear that I’m not asking you to
do this math on your own. The VA also has an online calculator.
Or, use this worksheet culled from resources from the USAA Educational
A Add up your spouse’s (or family’s) annual living expenses, including your rent or
mortgage payments, utilities, groceries, insurance, clothing, entertainment, car
payment and maintenance (including gas), and childcare.
B Add up your spouse’s salary and any other income, including estimated Social Security
C Subtract B from A to get the amount of living expenses you’ll need to replace.
D Divide amount in C by .04 to estimate the amount of death benefit you’ll need.
E Estimate total expenses related to your death, including funeral costs, estimated
hospital stays, estate taxes:
F Add an emergency fund of three to six months of living expenses:
G If you plan to cover college tuition for your children, calculate the amount that it will
cost for each child to attend school for four years, being careful to account for tuition
increases. You can base this amount on averages, or you can dig deeper into specific
colleges at collegecost.ed.gov.
Current averages: Tuition, fees, room and board at in-state, four-year public college:
$17,860/year. At private, nonprofit college: $39,518/year.
H Add up any other outstanding debts not included in A.
I Add together lines E, F, G and H to get your total expenses.
J Add together lines D and I. This figure represents your preliminary insurance needs.
K Calculate the value of other assets or insurance policies you own, including life insurance
through your employer, pensions, savings, 401(k) and IRA plan, and any liquid savings
L Subtract the amount in K from the amount in J to get an estimate of your total life
insurance needs:
Once you have a ballpark figure for your needs, you may see that the SGLI
coverage leaves you with a gap. There are two main kinds of life insurance you
can purchase on the individual market:
Term life insurance: Term insurance is simply a death benefit. You
purchase the product for a set term—often 10, 20 or 30 years—and when
that term expires, the policy is over. If you’re still alive, you get nothing; if
you die during the term, the beneficiary will receive your benefits. If the
policy is ending and you still want coverage, you can purchase another
term. SGLI is a term life insurance policy.
Permanent life insurance: Sometimes called “cash-value” life
insurance, this will stay in place until your death. There are two
components, a death benefit and an investment account, and your
premium is generally split between them. That means the interest earned
in the investment account increases the policy’s cash value. These policies
are sold as a hybrid of an insurance policy and an investment.
Commissions on permanent policies can be very high, and about half of
purchasers drop their policies within 10 years.
How do you decide between the two? The vast majority of people are going
to be best served by a term policy, which is significantly cheaper. There are
scenarios in which a permanent policy makes sense; mainly, if you know that
you will need a policy until the end of your life. Maybe you have a specialneeds child you’ll need to care for indefinitely, or you know you want to leave
an inheritance through life insurance. In cases like these, it makes sense to
price out a permanent policy.
How much you will pay depends largely on the size of your benefit and your
age—as you get older, term policies get considerably more expensive.
Currently, a 30-year-old nonsmoking man can get a 30-year term policy with a
$1 million benefit for around $900 a year. A 30-year-old nonsmoking woman
could get the same policy for $700. At age 50, that man would pay closer to
$3,500 a year and the woman would pay over $2,500.
This means you want to estimate the term you’re going to need on that
supplemental term policy as closely as possible, so you don’t end up having to
purchase another round later. Many companies will allow you to renew your
term policy, but because you’ll be older, you’ll likely pay more for it. To figure
out your term, consider:
The age of your children: You probably want a policy that will last until
they graduate from college. Calculate out from the age of your youngest
child—so if he or she is currently 2, you might want a policy that lasts until
age 22, or a 20-year term. If he or she is 15, a 10-year term might do the
The age of your spouse: Do you want coverage that lasts until he or
she retires? If you’re currently 40, that means you probably need at least a
25-year term policy.
Your age: Once you have funded your retirement to the degree that it
will pay (supplemented generally by Social Security and your military
pension) for your living expenses, you probably don’t need term insurance
any longer. So think about the age at which you plan to retire and then
calculate back from there.
What happens when you separate from the military and lose SGLI? That’s a
good question, and one that could leave many service members in an
expensive bind if they need to replace that coverage at a later age. There is a
program for veterans—Veterans Group Life Insurance (VGLI)—that will allow
you to convert your SGLI coverage to a VGLI lifetime renewable term policy. By
lifetime, I mean as long as you pay the premiums.
Many people will qualify for VGLI without a health exam—you’ll fall into this
category if you apply for benefits within 240 days of separating from service if
you separated on or after November 1, 2012. If you separated on or after that
date but you apply within one year and 120 days (485 days total) of
separation, you’ll need to answer health questions on an application and meet
good health requirements, says the VA. So it behooves you to get this taken
care of right away. If you don’t apply within 485 days, you lose this
VGLI, like SGLI, is available up to a maximum of $400,000, and can be
purchased in $10,000 increments. The coverage you choose can’t exceed your
SGLI coverage amount when you separated from service. You can, however,
purchase up to $25,000 of additional coverage on each five-year anniversary of
your policy without medical underwriting, as long as your total coverage is
under the $400,000 maximum and you are under age 60.
Here are the current monthly premiums:
Benefit Up to
Amount age 29 30–34 35–39 40–44 45–49 50–54
You also have the option to convert your SGLI to a commercial policy, as
long as you do so within 120 days of the date of your separation from the
military. You must convert to a permanent policy (not a term policy) from one
of the VA’s participating insurers—See the list here. You won’t have to provide
proof of good health. VGLI coverage may also be converted to a permanent
commercial policy at any time.
Term life insurance is available to your spouse and children via the VA as well,
through a program called Family Servicemembers’ Group Life Insurance. You’ll
pay an additional premium to insure your spouse (and note: You can only
purchase this coverage for your family if you are also covered by full-time
SGLI), but dependent children are covered free of charge. The maximum
amount of coverage for your spouse is capped at $100,000; for that amount,
you’ll pay a premium of between $5 and $50 a month, depending on your
spouse’s age. Dependent children will be covered for $10,000 each.
Note that if he or she is not a member of the armed forces, your spouse will
automatically be enrolled in the maximum amount of coverage—you can
reduce or cancel the coverage if you’d like. (Use the worksheet and tools above
to figure out if that’s enough.) And the policy is convertible to a permanent
commercial policy (though not a term policy).
In 2012, the latest year for which the Census Bureau has data, there were 3.6
million veterans with a service-connected disability. The possibility of injury—
whether short- or long-term—is simply a part of the job. Because of that, the
military has a number of ways to address the possibility that you may suffer a
debilitating injury:
Disability compensation: This benefit is in place in case you suffer a
disease or injury as a direct result of active military service; in other
words, the disability must have been incurred or aggravated by your
service, though the specific symptoms can arise after service is over. You
must be at least 10% disabled to receive benefits, which are paid tax-free.
The amount you receive will be based on a percentage rating applied to
your disability by the VA on a scale from 10 to 100%; you may receive
more if you have dependents. If you are deemed 30% disabled, for
example, and you have a spouse and one child, you’ll receive $483.75 a
month. Someone who is 100% disabled with a spouse and one child would
receive $3,134.32. Note that both physical and mental disabilities (like
PTSD) are covered under this benefit, and you’ll need to apply and provide
medical evidence of your condition and its relationship to your military
Special Monthly Compensation: If your injury means you need the
attendance of another person (often called “aid and attendance”) or you
lose—or lose the use of—certain extremities or functions, you may be
eligible for this additional benefit, which is also paid tax-free.
Traumatic Injury Protection Program: As part of your SGLI, you’ll pay
a $1 monthly premium for Traumatic Injury Protection (often called
TSGLI). Unlike the previous two types of disability compensation, this
covers injuries incurred both on and off duty. In order to be eligible for
benefits, you must suffer a “scheduled loss” as a result of a traumatic
injury. Scheduled losses include things like sight, hearing, speech,
amputation, burns and facial reconstruction; your benefit amount will vary
based on the scheduled loss you incur. You can view a full list of losses
and their compensation amounts here.
Once you separate from the military, your need for disability insurance
doesn’t vanish—particularly if you’re single or the sole earner for your family.
Ask yourself: If you weren’t able to work due to illness or injury, how would
you live? If the answer isn’t apparent, you need disability insurance. The most
cost-effective way to purchase a disability policy is through your employer. Ask
your benefits department if this is a possibility. If it isn’t, the same agents who
sell life insurance typically sell disability insurance. You can find one through
the National Association of Health Underwriters.
You receive health benefits through the military—no matter what branch you
are in—through a program called TRICARE. The program’s benefits are divided
into three tiers:
TRICARE Prime: This is the basic level of coverage, with no enrollment
fee for active-duty members and their families. It is the only option
available for active-duty service members. You receive care at a military
treatment facility or at in-network civilian medical providers. You’ll always
visit a primary care manager—much like a primary care doctor—first; he or
she will refer you to a specialist if necessary. Active-duty members pay
nothing; family members pay very little, if anything, in the way of an outof-pocket co-payment. This is the least expensive option, but it also offers
the least flexibility for family members’ care. If family members covered by
this plan choose to visit an authorized provider without a referral they’ll
pay a “point-of-service” fee instead of their regular co-pay, as well as any
additional charges from nonnetwork providers. Active-duty military
members do not have this option.
TRICARE Extra: This is an option only for family members. With this
plan, family members can schedule an appointment with a network
provider without a referral—though you may need pre-authorization for
some services. You’ll pay more—an annual outpatient deductible and a
cost share for covered services.
TRICARE Standard: This is much like TRICARE Extra—and again, only
available for family members. It gives family members the option of
visiting a non-network provider. You’ll pay a higher percentage of costs
and you will have to file your own claims.
As for costs:
Cost share for care
Nothing out of
pocket for
Not eligible
Annual outpatient deductible of $50 to $150 per
individual (no more than $100 to $300 per family)
depending on sponsoring service members’ rank
No enrollment
fees, if
Annual outpatient deductible of $50 to $150 per
individual (no more than $100 to $300 per family)
depending on sponsoring service members’ rank
For complete cost information, including the cost shares required for family members using TRICARE Extra
or Standard, visit the TRICARE website.
Long-term care insurance is designed to protect your assets should you need—
you guessed it—long-term care, which is extremely pricey.
Forty percent of people who reach age 65 will enter a nursing home during
their lifetime. And despite common misconceptions, Medicare does not have
you covered. The program may cover some rehab programs and short nursinghome stays, but it is not going to foot the bill for long-term stays. According to
the CDC, the average nursing home stay is 835 days.
Does that mean everyone needs to purchase this insurance? No. My rule of
thumb for long-term care is this: If you have assets of less than $500,000—not
including your house—you don’t need it. You’ll pretty quickly spend them down
and Medicaid—not Medicare—will pick up the slack. If you fall on the other end
of the spectrum, and you have assets valued at more than $3 million, you’re
better off self-funding care.
It’s those of us who fall in the middle who benefit from long-term care
insurance. But like disability, the coverage is pricey. This is because nursing
home stays themselves are expensive—prices are largely dependent on where
you live but a year’s stay can run $50,000 to $75,000 a year and up—and
because, as the statistics show, many of us will need a stay at some point.
Other factors that influence your premium include your age, health, the daily
benefit amount—how much your insurance will pay for your care per day—the
length of coverage, and whether or not you choose a policy that offers
protection against inflation (hint: you should). You may also choose a plan with
a waiting period, which means you will have to wait a certain number of days
before benefits kick in. The longer the waiting period, the less expensive the
We’ll talk more about all of these options in a second, but you should know
that while you can still shop around for coverage (I like to use the website of
the American Association for Long-Term Care Insurance), you’re eligible for the
Federal Long Term Care Insurance Program, which provides benefits to not
only members of the military, but also federal and U.S. Postal Service
employees (and their families). The program has several prepackaged plans
available to choose from (all offer inflation protection—the rates below are
based on 5% automatic compound inflation).
Daily Benefit
Plan Benefit Period
Monthly Premium if
Purchased at Age 50
Monthly Premium if
Purchased at Age 60
$150 Two
$109,500 90 days
$150 Three
$164,250 90 days
$200 Three
$219,000 90 days
$200 Five
$365,000 90 days
One important thing to note: Your premiums are obviously lower the
younger you are when you apply, but that doesn’t mean you should pick up a
policy immediately. You want to strike a balance between paying a high
premium later because of advanced age, and paying a lower premium for too
long because you purchased too early. The magic age, in my opinion, is mid121
Finally, let’s talk a bit about the benefits that are available to your family if you
were to die due to service. The Department of Defense has a publication called
A Survivor’s Guide to Benefits, that is a terrific resource.
Death Gratuity: The spouse of a service member who dies while on
active duty, or while serving in certain reserve statuses, will receive
$100,000 as a tax-free death benefit.
Dependency and Indemnity Compensation (DIC): This benefit
(which, again, you need to apply for) is tax-free and will be paid to eligible
survivors of those who died in the line of duty or whose death as a veteran
resulted from a service-related injury or illness. That includes spouses and
children who are unmarried and under age 18 (or 23, if attending school).
For veterans whose death is on or after January 1, 1993, the basic monthly
rate is $1,215. Additional amounts may be added (for example, $301 per
dependent child under age 18). For specific DIC requirements, visit the VA
Parents’ DIC: This is a similar tax-free benefit provided to parents of
service members or veterans. To qualify, parents must be below certain
income thresholds outlined by the VA here. The monthly rate varies by
parents’ income and whether they are still married and living together, but
compensation will be under $600.
Death Pension: This is a need-based, tax-free benefit that may be paid
to the surviving spouse and children of an eligible veteran who dies with
wartime service. Eligibility and the amount you receive is based on your
annual family income.
Paying for College/Training
Many people think service members have it made when it comes to paying for
college. And while it’s true that there are many programs to assist members of
the military with college and training expenses—and we’ll cover them shortly—
I know you still face many of the same struggles as civilians. You’re stuck
between saving for your children’s college and putting away money for your
own retirement (58% are saving for both, according to the FINRA Military
Financial Capability Survey). Compounding matters, over one-third of you have
student loans of your own—and a big chunk of you, 43%, say you’re concerned
that you won’t be able to pay them off. No wonder, one-quarter of military
families say saving for college is very difficult, and some are resorting to
extreme measures, like taking loans or hardship withdrawals from their
retirement accounts.
The goal of this chapter is to prevent and alleviate some of these feelings of
stress and desperation. You can do that by familiarizing yourself with the
assistance that is available, then learning how to cost-effectively bridge the
gaps on your own.
Military Tuition Assistance (often called TA) is available from each branch of
the military for eligible service members—which generally means those
currently serving, whether active duty or reserves. (The exception—the Navy
and Marines TA program covers only active duty; members of the Navy and
Marines Reserve may be eligible to use TA benefits from their active duty
counterparts if they have been activated under Title 10 orders.) The program
pays up to 100% of tuition expenses at accredited colleges, universities, junior
colleges and vocational and technical schools. There are, however, limits—
most service branches pay up to $250 per semester credit hour, with a limit of
$4,000 to $4,500 per fiscal year (the exception is the Coast Guard, which
recently changed their rules to cover 75%, up to $2,250.) Outside of tuition,
the money can often be used to cover fees for enrollment, labs and computer
You may have laughed when you got to the $4,500 limit in the previous
section. In many scenarios, that amount doesn’t even come close to footing
the bill for a full course load. According to the College Board, the average cost
of tuition and fees for 2013–14 at a public, four-year, in-state college is $8,893.
Go out of state, and you’re looking at $22,203. Want to attend a private
school? It will cost you an average of $30,094.
Type of School
Tuition and Fees Room and Board Total Cost
Public, two-year, in-state
Public, four-year, in-state
Public, four-year, out-of-state
Private, nonprofit, four-year
Source: Average published charges for full-time undergraduates, 2013–14. The College Board.
Of course, youll notice via the chart above that a two-year, in-state school
(typically a community college) easily fits within that $4,500 budget, and is a
popular choice for many members of the military. Why? For one thing, the
shorter time frame means youre less likely to be relocated before you finish
your education (and transferring credits isnt always as easy as the colleges
make it seem. Its also a way to dip a toe in the water, test out formal
education, and see what might be a good fit.) And as of late, Ive been
recommending community colleges as a good option for everyone, military
members and civilians alike you can test the waters, accumulate some credits
on the cheap, then transfer to a more expensive, more prestigious school to
get your diploma if youd like.
Even with these high figures, a four-year college degree shouldnt be out of
the question. The Montgomery GI Bill and the Post-9/11 GI Bill are available to
help pick up the slack where TA leaves off. If youre approved for TA and
eligible for GI Bill benefits, you can use the GI Bill to cover tuition and fees
above and beyond what TA will pay for. Lets talk about each separately:
Montgomery GI Bill: If youve been on active duty for at least two years,
you can tap into this benefit, which provides assistance for a wide range of
education and training programs among others, college degrees and
certificate programs, technical courses, flight training, on-the-job training,
licensing and certification tests. The hitch is that you have to sign up for
this benefit when you enter military service, generally in basic training or
in Officer Training School. Sign up and youll have $100 deducted from your
pay each month for a total of 12 months, and in exchange, youll receive
up to 36 months of benefits, payable in an amount based on the type of
training or the number of credit hours for which you have enrolled. Youll
generally have 10 years to use the benefits.
To apply for Montgomery GI Bill benefits, you can fill out the Application for
VA Education Benefits on the U.S. Department of Veterans Affairs website. You
can also apply in person at a regional VA office.
How much could you receive? As of October 2013, these are the rates under
the MGIB for institutional training:
Training Time
Monthly Rate
Full time
¾ time
½ time
Less than ½ time but more than ¼ time
¼ time or less
Source: benefits.va.gov
Post-9/11 GI Bill. This is a program for service members who logged at
least 90 days of active duty after September 10, 2001, or were honorably
discharged for a service-related disability after serving for at least 30 days
after September 10, 2001. Like the Montgomery GI Bill, the Post-9/11 GI
Bill provides up to 36 months of education benefits, though youll have up
to 15 years to use benefits from this bill. Youll receive assistance with
tuition and fees, a monthly housing allowance (unless youre using the
benefit while on active duty), and a books and supplies stipend of up to
$1,000 per year.
The percentage of benefits you are eligible to receive depends on the
aggregate length of your active duty service after September 10, 2001:
Aggregate Period of Active Duty
Percentage of Maximum
Benefit Payable
At least 36 months or at least 30 continuous days with discharge for
service-connected disability
At least 30 months < 36 months
At least 24 months < 30 months
At least 18 months < 24 months
At least 12 months < 18 months
At least 6 months < 12 months
At least 90 days < 6 months
Source: Veterans Benefits Administration, VA Pamphlet 22-09-1
The Post-9/11 GI Bill will probably cover all tuition and fees at in-state public
schools, but there may still be a gap in coverage if you decide to attend a
private or out-of-state school. In that case, you may choose to attend a school
that participates in the Yellow Ribbon Program. These schools have agreed to
fund costs that arent covered by the Post-9/11 GI Bill, and the VA will match
them dollar-for-dollar, up to the total cost of tuition and fees. You can find
more information here.
Maybe it’s not college for yourself you’re concerned about—you’ve been there,
done that—but college for your children. Or maybe you’ve settled into a point
in your career when your spouse can begin to pursue an education and career
choice. As a service member, you not only have tuition support for yourself, but
also for your spouse and dependents.
If you’re eligible for the Post-9/11 GI Bill, you may be able to transfer unused
benefits—all, or just a portion—to another immediate family member. In fact,
about a fourth of these benefits are used by eligible family members rather
than the service members themselves. The Department of Defense must
approve the transfer, and then the new beneficiary can apply for the benefits
through the VA. And keep in mind, you don’t have to transfer your benefits to a
single person. If you have more than one child, for instance, you can transfer
some to each. Spouses are eligible for transferred benefits, too.
There are other transfer eligibility requirements as well, most of which fall
on your shoulders and dictate how much service you must have under your belt
or how much additional service you must agree to. In some cases, you may be
required to commit to an additional four years of service. For all of the fine
print, you should visit the VA Benefits website or contact your base education
or personnel office .
The other program you should explore is the MyCAA scholarship program. It
stands for My Career Advancement Account, and can provide up to $4,000 to
eligible military spouses as tuition assistance (with a fiscal-year cap of $2,000).
The money can be used to secure licenses, certifications or associate’s degrees
at any academic institution that is approved for participation in the program.
Eligibility is limited to spouses of active duty service members in pay grades
E-1 to E-5, W-1 to W-2 and O-1 to O-2. Spouses must start and complete the
program while the military member is on Title 10 military orders. And, as
always, there is some fine print. Most notably:
Spouses of Coast Guard members aren’t eligible.
The program does not cover bachelor’s degrees or other advanced
Associate’s degrees in general studies, liberal arts and interdisciplinary
studies that don’t have a concentration are excluded.
The program doesn’t cover books, supplies, registration fees and a number
of other extra charges.
For more information about the MyCAA program, and to apply, visit the
website. Once there, you can fill out the spouse profile and the system will
determine if you are eligible. The site also offers a list of approved careers and
accredited institutions.
If you’re a reservist, and you were called to active duty for at least 90 days on
or after September 11, 2001, you may be eligible for some education benefits
of your own under the Reserve Educational Assistance Program (also known as
REAP). The program covers 36 months of benefits, though the amount you’ll
receive will vary based on the number of days you were on active duty and
current tuition rates (amounts are adjusted each year to account for rising
education costs).
As of October 2013, here is what you could receive per month for
institutional training:
Training Time
Consecutive Service of 90
days but less than 1 year
service of 1 year+
Service of 2
Full time
¾ time
½ time
Less than ½ time;
more than ¼ time
¼ time or less
Source: benefits.va.gov
The program may also cover flight training, on-the-job training, fees for
licensing or certification, and entrepreneurship classes. For amounts covered
under those programs, visit the VA Benefits website.
$ 6 0 0 BUY-UP PR OGR AM
If youre taking advantage of either the Montgomery GI Bill or the REAP, you
should know about the ability to buy more benefits. Eligible active-duty military
members can contribute an additional amount of up to $600, which will
increase your REAP or MGIB benefits. For every $20 you contribute, youll
receive an additional $180 in benefits, up to a total of $5,400 in available
additional benefits. To receive that full $5,400 increase, youll need to
contribute the maximum $600.
Here are a few examples of how much your monthly MGIB or REAP benefits
will be increased by your additional contribution:
You pay
a total of
added to
monthly fullamount time payment
added to
monthly ¾time
added to
monthly ½time
Amount added to
monthly less-than-½but more-than-¼-time
added to
monthly ¼time payment
Source: benefits.va.gov
Finally, let’s talk about saving for college, either for your kids, for your spouse,
or for yourself, to fill in any gaps in the benefits offered by the military. Service
member or civilian, here’s the first rule: Retirement comes before college.
You’ve likely heard this before, perhaps even from me, but it bears repeating:
There is financial aid available for college—and, in your case, a considerable
number of programs. Outside of your military retirement benefits—which are
typically not enough to fund a comfortable life—no one is going to fund your
retirement but you.
Once you’re on track with saving for retirement, you can turn your efforts
toward college savings, and you want to start by getting an idea of how much
you need or want to save. The tuition figures from the College Board,
referenced on page X, are a good place to start. If you’re saving for your own
education, or for your spouse—in other words, someone who will be attending
school in the near future—they’re likely to be fairly accurate. But if you’re
saving in anticipation of your young children attending college in 10 or 15
years, you should know that the College Board also estimates that tuition rates
have been rising at an annual rate of 2.3% lately (and, I should note, that’s
actually a good figure—in previous years, they’ve risen by as much as 5% a
I can practically see you doing the math in your head. Most parents will not
be able to foot that entire bill. But having a goal in mind—I suggest aiming to
save one third of what you think your children will need—will help motivate
you to put the money away. Then scholarships, financial aid, student loans and
your GI Bill, if you can transfer it, will help make up the difference.
There are several college savings tools available, but the one I like and plan
to focus on here is the 529 college savings plan. These plans are offered by
individual states, and while it used to be difficult to invest outside of your state
—thus making this a tough option for people who move frequently—these
days, most plans allow non-state residents to participate. Still, you’ll first want
to look at the plan in the state where you pay income taxes, which as you well
know, may not be the state where you are currently living. Look at this plan
first because some states offer a tax break or other perks for residents who
contribute to the state’s plan.
If you don’t like your state’s plan, or your state doesn’t offer a tax break (or
doesn’t charge income taxes), you can shop elsewhere. Savingforcollege.com
keeps up-to-date information on every state plan, including ratings, investment
options and fees. Use the website to compare your options and select a plan.
Contributions to 529 plans are made with after-tax dollars, and if you use the
money for college, withdrawals are tax-free. If you need to pull out the money
for any other reason, you’ll face income taxes and a 10% penalty on your
earnings. There are a few exceptions to these rules. They aren’t enforced if the
beneficiary of the account passes away, becomes disabled or receives
scholarships that negate the need for the money. The beneficiary can be
changed at any time, as well, so if you save for yourself or your spouse and
end up having money left in the account, you can use the money for a child or
other relative instead.
Finally, a word about student loans: If you or your children need to borrow
for college—and it should be noted that most people do—this is generally
considered good debt, provided you only take on a reasonable amount. Aim to
limit borrowing to the amount you expect to earn (or expect your child to earn)
in the first year out of school. And look at federal student loans. Not only are
they the cheapest way to borrow, they also come with protections that private
student loans don’t provide.
There are several federal loan options available:
Direct Subsidized Loans are need-based loans made to undergraduate
students. Up to $12,500 may be borrowed per year, and interest on these
loans is paid by the Department of Education as long as you are in school
at least half-time (and during the first six months after you leave school).
Direct Unsubsidized Loans do not require demonstrated financial need and
are made to eligible undergraduate, graduate and professional students.
Interest will accrue while you are in school. Undergraduates may borrow
up to $12,500 per year; graduate students may borrow up to $20,500 per
Direct PLUS Loans are for graduate or professional students, or parents of
dependent undergraduate students (to help pay for the student’s
education expenses—you may borrow enough to cover the remainder of
costs not covered by financial aid).
Currently the interest rates on federal student loans are as follows:
Loan Type
Fixed Interest
Undergraduate student
Direct Subsidized and Unsubsidized
Graduate and professional student
Direct Unsubsidized
Parents and graduate and professional
Direct PLUS Loans
Source: Rates for 7/1/13–6/30/14; direct.ed.gov/calc
The federal student loan program has special benefits and protections in
place for members of the military. They include:
Public service loan forgiveness: This isn’t specifically for service
members, but it may apply in your case: Any remaining balance on your
loans may be forgiven once you’ve made 120 qualifying payments after
October 1, 2007 while employed in military service.
Military service deferment: During certain periods of active duty,
including war and national emergencies, you may be able to postpone
student loan repayment. You may also postpone repayment while you
prepare to return to school after serving active duty.
Hostile 0% area interest rate: If you’re serving in a hostile area that
qualifies you for special pay, you may be exempt from paying interest on
direct loans made after October 1, 2008. The exemption lasts for up to 60
HEROES Act waiver: The Department of Education may waive
documentation requirements while you are on active duty.
For more information about military assistance with federal student loans,
take a look at this pamphlet from the Department of Education.
There are people who say they’re not good with change. You, unfortunately, do
not get that luxury. And while many of the military families I spoke to for this
book told me that they’ve quickly gotten used to change—frequent relocations
and deployments will do that. They also report that it never really gets easier.
Not only do you frequently not know where your next move will take you,
but that move often comes suddenly, with little time to prepare. And
adjustments must be made to a new area, and in some cases to living apart
from your spouse or family—if not due to deployment, then due to training,
spouse employment or the desire for your children to finish a school year in
their current location.
This chapter addresses the financial aspects of the transitions that come
with the military lifestyle, from managing your finances during a deployment to
running two separate households to dealing with the unexpected—like a
divorce—and after you separate from the military. Let’s start with the most
common scenario: PCSing.
The Department of Defense reports that the average military family moves 10
times more often than their civilian counterparts. Military children will move
anywhere from six to nine times between kindergarten and high school
graduation, according to the Military Child Education Coalition.
Trying to keep that number down is one reason why some families choose to
live separately on occasion. According to the Blue Star Families survey,
deployments account for only half of the time military families spend apart—
the rest is due to training, spouse employment, child or spouse education, or
the inability to sell a home. If you have to live separately, you’ll deal with
many of the issues we address in the section on deployment, next.
Relocation Benefits
As soon as you receive PCS orders, you’ll want to contact the relocation
assistance office on your new base. The folks there can help familiarize you
with your new area, discuss whether you should buy or rent, help you find a
new school or child care for your children, give you tips on moving with pets,
and generally hold your hand through the experience. If you’re going overseas,
they can also give you important information about laws in the new country
you are moving to. For example, some countries require a quarantine when
bringing pets into a country (the servicemember has to pay this out of pocket).
Other countries have laws about items and types of pets that are prohibited.
For example, some countries limit the types of weapons that can be imported,
some ban animals like pit bulls. It’s good to know as much as you can upfront.
Your current base transportation office can help you figure out what moving
expenses will be covered by the military. You’ll have a maximum weight
allowance, determined by your pay grade and whether you have dependents.
In general, you have two choices when you move: The most common—and
least stressful—is to coordinate your move through the Transportation
Management Office at your base, which will take care of all of the details for
you. Your other choice is a Do-It-Yourself Move, or DITY. That means you
handle the logistics, and you’re reimbursed for 95% of what the military
calculates it would have cost them to move you, up to a maximum weight
allowance. That effectively means you’re given a budget, and if you spend less
than that, you get to pocket the difference. Many military families choose a
DITY move to make a little extra money—it’s up to you whether that extra
cash is worth the headache.
Other benefits available to you while PCSing:
House Hunting Trip (HHT): You may be allowed travel from your old
station to your new one, for up to 10 days, with travel and transportation
expenses reimbursed (within allowed limits). You won’t be charged leave
for the time away. This entitlement is only available to those PCSing
within the United States (and Puerto Rico).
En Route Travel: This covers a per diem for meals, incidentals and
lodging during travel to your new duty station.
Advance Pay: You are eligible for up to three months advance pay, at
0% interest, to be paid back over a 12 month period. No it’s not as good
as having cash on hand, but it’s better than falling back on your credit card
(as long as you work it into your budget).
Temporary Quarters Subsistence Expenses: This reimburses you for
costs incurred while living in temporary housing, including lodging, meals
and other necessities.
Real Estate/Unexpired Lease Allowance: This is designed to cover
expenses incurred for the sale of a home you owned at your old station
and the purchase of a home in your new location. It may also cover
charges associated with canceling a lease early.
If you’re lucky—and you’ve chosen to bank with a large, nationwide institution
or a military financial institution—you’ll be relocated to an area where your
current bank or credit union remains convenient. That’s not always the case,
however. Even the biggest banks have dead zones without branches, so often
you’ll find yourself switching more often than you’d like. (Note: Opening a bank
account overseas, if that’s something you decide to do, may take a little more
work. It’s a good idea to get information on that from someone at your next
base so you can hit the ground running. This is essential when there are other
currencies involved.)
Here are a few ways to simplify the process:
Find your new bank or credit union: You want to have the new
account in place before you close the last one, so take the time to do a
little research on what’s available in your area. You can use a website I
like, FindABetterBank.com, to search out and sort your options. It allows
you to plug in your zip code, refine your preferences—whether options like
online bill pay and mobile banking are “don’t care,” “nice to have” or “must
have”—and then generates the banks and accounts that best suit you.
Go over your old bank statements: Look at the last three or four, and
circle any transactions that weren’t initiated by you writing a check or
swiping your debit card. These are likely automatic—the gym membership
that charges you on the first of the month, the electric bill that you set up
in automatic bill pay, your direct deposited paychecks. Make a list of all of
them, cancel them, and set them up again through your new bank.
Use the free resources from your new bank: It may offer a switch kit
that can make changing accounts easier.
Leave your old account open for three months: This is the magic
number to grab any quarterly payments that the audit you did in step two
may have missed. Leave a little money in the account to cover these just
in case—these days, it will be fairly simple to transfer the money to your
new account when you’re ready to close out.
The Servicemembers Civil Relief Act—which I’ve mentioned throughout this
book—provides you with some protection against any tax implications that
might come from these frequent relocations, including double taxation. If, for
example, you maintain your legal residence in Virginia but are relocated to
California, you’ll continue to pay taxes—including income and personal property
—to Virginia, not California. And if your spouse works, the Military Spouse
Residency Relief Act protects him or her from paying taxes to a state just
because you’re there because of military orders.
The events of 9/11 substantially increased deployments of U.S. troops, creating
countless challenges for military families—many of them financial. I often
encourage couples to hold regular money meetings—informal conversations
about where you stand financially. It’s difficult and, in fact, in many cases,
impossible to do that during a deployment. Your conversations are limited and
infrequent, and talking money isn’t top of mind when there are kid and life
updates to be shared. There are logistical issues as well: You’re banking from
two distant locations, and while bank online-interfaces make this substantially
easier, a service member overseas may have little access to the Internet.
And if you’re single? You’ll face a host of separate issues, most of which can
be solved by tying up lose ends before you leave the country and appointing a
family member or close friend as your financial power of attorney, which we
discuss in more detail.
If you don’t already bank online, now is the time to start. If you’re married or in
a partnership, sharing at least one account with online banking means you’ll
both be able to check your finances no matter where you are, and two sets of
eyes is better than one. You can also set up many of your bills to be paid
automatically, as long as you know there will be enough money in the account,
which takes one task off the list of the spouse who is still at home and taking
care of your bills while you’re away. A spouse (or joint account holder) will also
be able to manage the money in a shared account without your permission. If
you’re single, managing online allows the person to whom you give power of
attorney—perhaps a parent or sibling—to step in and help you.
But while banking online makes the logistics of being separated easier, it
doesn’t help with any deep-seated financial issues, like overspending. To solve
these problems, you need a budget.
I think all families should have a budget, but it’s never more important than
when you’re in a situation in which communication is limited. So go through the
process of setting up—or revisiting—your budget before you leave. That will
give you a baseline for what you should be spending where. It takes any
guesswork out of the equation for the spouse or partner who remains at home
and will be largely responsible for paying the bills and maintaining the
You might find (I spoke with many people who do) that a deployment is an
excellent time to tighten the reins and focus on saving, rather than spending.
Your income is likely to be up during this time, your taxes will be down, and
your spending should naturally decrease. The deployed partner will have his or
her meals, lodging and clothing taken care of, so those will be removed from
the family budget. You’ll need fewer groceries. Maybe you can get by with one
car. And your entertainment expenses may be reduced significantly as well.
For the discretionary spending that does take place—things like clothes, new
shoes, household items that are wants more than needs, and entertainment—
it makes sense to consider some limits before you deploy. Talk about an
allowance of sorts; an amount that you both agree is safe to spend on these
things every month without discussion. For some families, that might be $50.
For others, it might be $200 or $300. Agree that if you want or need to
purchase anything outside of that limit, and it isn’t in the budget, you’ll wait
and discuss it with your spouse first.
One last note: Many of the military spouses I spoke with for this book talked
about their use of retail therapy to get through the loneliness and stress of a
deployment. I understand why this helps—in the short term—and I also
understand the need to look nice when your deployed partner returns home.
But you can’t let this coping mechanism get out of control. It can very easily
become a problem, a crutch that helps you get through the days but quickly
leads to destructive amounts of credit card debt. And when you’re sad, lonely
or otherwise emotional, you’re likely to spend more because your defenses are
down. So aim to find other ways to cope: a glass of wine with friends, exercise,
long walks, time spent with your children (and away from them—treat yourself
to a babysitter instead of a new pair of shoes), volunteering. All of these will
help pass the time and allow you to stick to your budget.
Getting the following paperwork in place prior to deployment will make things
easier on your family—and yourself, when you return. I go through these in
detail in Chapter 8, so I’m just going to touch on each briefly here:
Power of attorney: This document is particularly important if you’re
single—but you’ll want it if you’re married as well. It gives a person you’ve
selected the ability to manage and make decisions regarding your
finances. You can designate the power to be in effect for a certain period
of time (generally, the length of your deployment), and pick a family
member, spouse or close friend. Note: A General POA should rarely be
used, except by spouses. A Limited POA is most often the best type of POA
because it specifies limits of power.
Will: You know what a will is, and why you need one. But to drive the
point home: If something were to happen to you while deployed or
otherwise, a will directs your family to divide your property as you’d like. It
also names guardians for your children, if there is no surviving parent.
Advance directive or living will: This outlines what steps you would
like medical personnel to take in the event you are injured or ill—things
like whether you want life support, resuscitation, or other extreme
measures to prolong your life. You should also name someone (a healthcare proxy) who can make these medical decisions for you in the event of
a gray area.
You’ll also want to verify beneficiaries on your life insurance and retirement
accounts. People often forget to do this after a divorce, which could leave a
current spouse out in the cold in the event of an untimely death. And finally, be
sure that someone—a spouse or family member—knows where your essential
paperwork is kept. Things like marriage licenses, property deeds and car titles,
your birth certificate, divorce agreements, citizenship papers, insurance policies
and other legal documents should be stored in a safe place that can be
accessed if necessary.
As part of the Servicemembers Civil Relief Act, you can get the interest rates
on debts incurred before you entered active duty reduced to 6%—this includes
debts like your mortgage, car loans and credit cards. Considering that the
average credit card interest rate is over 15%, this is a huge perk. But it isn’t an
automatic one—in order to take advantage, you’ll need to submit a copy of
your military orders and a written request for the reduction to your creditor.
The creditor will then retroactively reduce your interest rate, and forgive the
difference in interest that results from the reduction. Note that this may also
apply to cosigned loans.
In your request, be sure to include your account number and note that your
active-duty status has impacted your ability to meet your loan payments at the
current interest rate. Some lenders, including USAA, may reduce your interest
rate even further than the 6% cap.
Here are a few other ways the SCRA might benefit you:
Home lease protections: If you receive PCS or deployment orders that
will put you in a different location for at least 90 days, you will generally
be allowed to terminate a home lease. Additionally, you may be protected
from eviction if your monthly rent is below a certain threshold (currently
$3,047.45), unless your landlord is able to obtain a court order.
Auto lease protections: The law allows you to terminate a car lease if
you receive PCS or deployment orders outside the continental US for a
period of at least 180 days. If you purchased a car and made a deposit or
other payment before you entered the military, your creditor can’t
terminate the contract or repossess the car without a court order, as long
as you are in service.
Insulation from foreclosure: If you took out your mortgage before you
entered service, your lender will be required to get a court order before
being able to foreclose on your home during your period of military service
—and for nine months after.
Cell phone termination protection: If you are relocated to a place
where your cell phone carrier doesn’t have service, and you will be there
for at least 90 days, you can terminate your cell phone contract without
paying the penalty. (Note: You can also place your phone line on vacation
mode if you want to keep your phone number, but don’t want to pay the
bill while you are gone. Although some carriers state they will do this for
up to a couple years, in most cases it’s a provision used for months at a
When you’re deployed, your TRICARE coverage will remain intact for your
family. But TRICARE does recommend taking a few steps before you leave:
Leave a copy of your orders, your power of attorney and the necessary
paperwork, in case your family needs copies of medical records.
Be sure to have someone pay any premiums you owe, or set up automatic
Make sure your family is aware of how the plan works and where they can
go to get care and fill prescriptions.
Make sure family members are registered (and up to date) in the Defense
Enrollment Eligibility Reporting System (DEERS), which is required as part
of the eligibility for TRICARE. Be sure your family knows how to make
changes in DEERS, if necessary, and that they have up to date ID cards.
Military families tell me that one of the hardest parts about their lifestyle—
aside from constant moves—is the frequent fluctuation in income. When you
PCS, your base pay will remain the same, but your basic housing allowance
(BAH) could change drastically. Moving back to the U.S. from overseas means
a loss of COLA, or cost of living allowance, which can be a huge transition. And
if your spouse worked in your old location and had to leave his or her job due
to the move, you’ll be short that income, at least for a while.
The end of a deployment means a similar adjustment. If you’re deployed in a
combat zone, your income will be federally tax-free. You may also receive
additional stipends in the form of a family separation allowance, imminent
danger pay and hardship-duty pay. As you can imagine, these amounts add up
—particularly the untaxed income—and it can mean a big shock, both for you
and your family, when you return home. But this isn’t the only shock to your
wallet you may experience. As we learned when the government most recently
shut down, furloughs can impact military families and, while typically
temporary, cause similar sudden changes in income.
Bottom line: You need to get used to a fluctuating income. As I noted in the
budgeting chapter, nearly a third of military families report experiencing a drop
in income in the last year.
Keep in mind, many forms of additional pay—specifically BAH and the family
separation allowance—are intended to be a reflection of additional costs you
may incur. That means that if these allowances change, or you lose them
completely, your cost of living should change in step. In real life, it doesn’t
always work so smoothly. It’s hard to adjust to a different income level, even
when your expenses go down. Most people are naturally inclined to continue
spending at the level they were before. And so the goal, in this situation, is to
nip it in the bud immediately.
The first step is to go over your expenses again. If you simply PCSed, it may
mean they only changed slightly. If you’re furloughed (although the
government hasn’t furloughed members of the military recently as it has done
with civil service workers) and there’s no end in sight, you’re going to have to
take a hard look at what you can cut to keep yourself afloat—all unnecessary
spending might have to be curbed for now until your income returns to normal.
Consider cutting your cell phone plan back, changing your dining-out habits,
clipping coupons, scaling back the cable bill—whatever you have to do to make
it work. Then redraft your budget according to the process I laid out in Chapter
Finally, to avoid this kind of shift in the future, you can do what many
military families do: Aim to live on one salary—your military income—and bank
anything else that comes in the door. That way, you’re prepared for a drop in
income and you have a nice cushion to fall back on should you need it. And
take a deployment as an opportunity to significantly reduce expenses and bank
money for leaner times, as we talked about earlier in the chapter.
If you find that you can’t meet your financial obligations—like loan payments
or other payments to your creditors—be sure to take advantage of the
Servicemembers Civil Relief Act provisions. That can help you maintain your
residence and keep your interest rates under control. If you’re still struggling,
pick up the phone and call your lenders. They often are willing to work with
you, particularly as a member of the military. If they won’t, pay your bills in
this order:
Mortgage, car payment, utilities, child support, doctor
IRS, student loans
Everything else
I’ve heard people compare separating from the military and entering a civilian
career to leaving college, and the assessment rings true in many ways. The
military method of compensation means you almost always have at least a
portion of your living expenses paid for, no matter where you live. For the first
time in a long time, you need to make long-term decisions about what you
want to do and where you might want to live.
The big difference? Rarely do traditional students leave college, ready to
enter the real world, with a family and children to consider. It’s harder to make
any life transition when you have a family to support, and going from the
security of the military to what is still an unstable job market is daunting.
A few pieces of advice as you manage this massive transition:
Plan ahead: If you know your retirement or separation date, start
thinking well in advance about what you want to do and where you want
to live. Having these decisions in place—even if you don’t have a specific
job nailed down—will make you feel more secure.
Consider a role reversal: Often, service members are the main
breadwinners in the family, typically because frequent moves make it hard
for a spouse to keep a job, let alone climb the corporate ladder. Maybe
now is the time for your spouse to focus on his or her career. I’ve spoken
to military spouses who were finally able to go back to school or pursue
career dreams once their husband or wife left service.
Bulk up your emergency cushion: It will make you feel more secure
during any transition, but it’s particularly important if you haven’t nailed
down a new job.
Embrace the uncertainty: You’re used to it, after all; change, as I noted
at the start of this chapter, is part of the lifestyle. You may face a few
months of unemployment before finding work. It may take you and your
family some time to decide where you want to live permanently. Be glad
that you’re seasoned in this area.
Narrow your search: There are websites that specifically list jobs for
veterans—one is hireahero.com. You can post your resume, search job
listings, and network with other veterans who are looking for civilian
positions. The VA also has a list of resources—including military skills
translators that will help you match up your military service and
experience with a civilian job—on their website.
Military.com has a military skills translator as well.
Skip the military jargon: It won’t translate to a civilian office
environment or interview, and it makes you sound like an outsider.
Take advantage of military assistance: The Transition Assistance
Program, or TAP, is designed to make your move into a civilian life as easy
as possible. The program offers tools and resources, all of which can be
found on militaryonesource.mil/transition.
Understand your health care options—especially if you have a
family: There is an excellent rundown on this on The Military Wallet, a
blog devoted to helping military members and families with finances.
Top Veteran Employers
CSX Transportation
Dollar General
Fluor Corporation
General Electric
Navy Federal Credit Union
Northrop Grumman
Paychex, Inc.
Sears Holdings Corporation
University of Phoenix
Verizon Communications
Source: edited from a list on Military.com
Here’s the good news: The military divorce rate fell last year to 3.4%. It was a
small change, down from 3.5% in 2012 and 3.7% in 2011, which was the
highest rate since 1999 (the civilian divorce rate was 3.5% in 2009, according
to the CDC). At the time, military spokespeople speculated that troop
withdrawals were to blame—suddenly, families who haven’t seen each other in
some time were back together.
Research from the RAND Corporation, released in September of 2013, backs
this up—and found that deployment to Iraq and Afghanistan has been found to
be particularly devastating to a marriage. According to the study, couples
married before the 9/11 attacks, and who experienced a deployment of 12
months to war zones, were 28% more likely to divorce within three years of
marriage. Divorce risk was lower for those who were married after 9/11, likely
because they went into the marriage prepared for periods of long deployment.
Taking the research a step further, the study found that length of
deployment has a significant impact—more cumulative months away increased
the risk of divorce among couples, no matter where the deployment was or
when the couple married. And 97% of divorces took place after the return from
Finally, women in the military are more likely to divorce as a result of a
deployment. The divorce rate for women in the military is higher in general—
7.2% in 2013, according to the Defense Department, down from 8% in 2011.
In many ways, a military divorce is similar to a civilian one. You’ll file in the
state where you have legal residence, not necessarily the state where you are
currently stationed. States may handle the division of property differently,
however, so it pays to research how the process works in your state—
particularly if you and your spouse have designated different states as your
legal residences. Already confused? You and your spouse will both be able to
work with a military legal assistance attorney, free of charge. This person can
give you advice about how to best proceed with the divorce, but for civil court
—for instance, if you need to contest custody arrangements or division of
assets—you will need civilian attorneys.
The Uniformed Services Former Spouse Protection Act (USFSPA) outlines the
benefits that are provided to the former spouses of service members. It isn’t a
promise of benefits, but rather legislation that gives state courts authority to
divide a service member’s retired pay. It also details medical and other
benefits that may be available to former spouses. Whether you receive those
benefits after a divorce as the non-military spouse depends on how long you
were married, how long your former spouse was in the military, and the
intersection of those time periods—in other words, during what portion of your
marriage was your spouse also in the military? There are two rules to know:
The 20/20/20 rule. As long as you don’t remarry, you will receive medical
privileges if you were married for at least 20 years, your military spouse
served for at least 20 years, and you were married for at least 20 of the
years of service. This also makes you eligible for commissary and
exchange benefits, which allows you to shop at a discount.
The 20/20/15 rule. You may still qualify to keep your TRICARE medical
benefits for one year if you meet this rule, which means that your spouse
performed 20 years of service and you were married for 20 years, but your
marriage overlapped his or her military service for only 15 years.
Note: If you are ineligible for continued medical coverage by either rule, you
may be able to purchase a policy through the Continued Health Care Benefit
Program. This is temporary coverage that lasts for up to 36 months, and you
must purchase within 60 days of losing your TRICARE. You will pay premiums
for the coverage.
Other benefits at stake during a military divorce:
Retired pay: Whether and how retired pay is divided between spouses
depends on state law and court decision. The USFSPA allows “disposable”
retired pay—essentially retired pay less deductions for things like veteran
or military disability pay and a Survivor Benefit Plan (more on this in a bit)
—to be divided the way a civilian pension would be. A former spouse
might receive between 0 and 50% of the military member’s retired pay. If
you were married for 10 years, and that overlapped with 10 years of
military service, a former spouse may receive any amount rewarded as
“direct pay,” meaning it is paid automatically by the military.
Housing: If a service member stops living in military housing, the spouse
also will likely need to vacate the home within 30 days.
Child support: The military requires a service member to temporarily
support family members after divorce or separation, even if there is no
court order or other requirement to do so. But this protection is limited,
and spouses must still request child support or alimony during the divorce
in civilian court. If a military member refuses to pay court-ordered support,
a spouse can request wage garnishment through the Defense Finance and
Accounting Service.
Survivor Benefit Plan: This is an annuity established for survivors that
pays the beneficiary 55% of a military member’s pension after the military
member dies. A court may order the military member into a Survivor
Benefit Plan with the ex-spouse named as beneficiary during a divorce, but
it is not required during all divorces. Note: Even if decree orders this, DFAS
must be notified within one year of divorce or former spouse is out of luck;
it’s very important to follow through to ensure this protection. If the nonmilitary spouse remarries before age 55, he or she will no longer be
eligible for the plan (unless that marriage also ends).
Thrift Savings Plan: This is the retirement plan offered to members of
the military, and it is treated much like a 401(k) or IRA in divorce. It may
be divided as agreed upon between spouses in a divorce.
One final important point here: The Servicemembers Civil Relief Act, with
which by now you are intimately familiar, includes a provision that allows a
service member to stall a divorce—or other court case—if they are unable to
respond to court actions due to their military duties. The postponement will
last an initial 90 days and can be extended in additional increments of 90 days.
You’ll need to submit a request in writing.
Finances for Caregivers
There are caregivers. And then there are military caregivers.
In this country, more than 40 million traditional caregivers—most of them
women—provide care for a spouse, child, relative or friend. Half of those
people put in a full day’s work (8 hours) every week as caregivers; 20% put in
a full week’s work (40 hours) each week as caregivers. It can be costly. Most
family caregivers are not paid for the huge amounts of time they put in. They
often reduce their hours at work, and are forced to channel what might be
retirement-plan contributions into caring for loved ones. They also typically
suffer stress-related medical issues of their own as a result of rarely getting a
Then there are the between 275,000 and 1.1 million providing care for
military members or veterans who served in Iraq or Afghanistan, significantly
more if you add those caring for members who served earlier. They are
overwhelmingly women—spouses, parents and children of military members.
Nearly 70% of them, according to a National Alliance for Caregiving survey,
provide more than 20 hours of care each week; 20% provide more than 80
hours. Two-thirds of caregivers—particularly those caring for a veteran
suffering from a traumatic brain injury (TBI), post-traumatic stress disorder
(PTSD), or anxiety or depression—suffer some sort of emotional distress
There are two factors that particularly differentiate the two groups. Age is
the first. Military caregivers tend to be significantly younger—70% of military
caregivers are spouses compared with 6% of caregivers in general—who, in
addition to providing what their veteran needs, are also often responsible for
young children and for earning an income. (For that reason, most military
caregivers live in the same home with the person for whom they’re providing
care; this isn’t generally the case for other caregivers.) The second factor is
time. Caring for an older parent or relative may last a few years. Caring for a
20-year-old injured in a recent war can go on substantially longer. More than
56% of military caregivers have been providing care for five years, 30% for a
decade or more. It only makes sense that these numbers will continue to grow.
As a result, the financial toll is enormous. More than 60% of military
caregivers are forced to reduce their hours at work. Nearly half of them quit
work or retire early because they simply cannot do both. Half of all military
caregivers feel a high degree of financial hardship.
In some ways, military caregivers fulfill the same functions as all caregivers.
They coordinate and (about half the time) administer medical care. They help
with the so-called activities of daily living: eating, bathing, dressing, walking
(or using a wheelchair)—as well as the so-called instrumental activities of daily
living, including grocery shopping, housework, transportation and meal prep.
According to the National Association of Caregivers study, 85% of military
caregivers also function as case managers. This includes communicating with—
and between—health care professionals and providers, organizing nursing or
at-home care, and being the liaison with the Military Health System, the
Department of Defense, the Veterans Health Administration, the Veterans
Benefits Administration and the members’ own physicians and hospitals.
Almost all military caregivers—87%—also help their veteran with managing
their own or the family’s finances. When the member has a TBI, that number
rises to 93%.
And all of these things are usually falling on one set of shoulders. Whereas
an adult child caring for an aging parent might have siblings to share the load
(or chip in for a paid caregiver to do the same), most military caregivers do
not. Two-thirds of caregivers say there are no paid caregivers in the picture.
Only one-quarter say unpaid friends or other family members help in even a
moderate way.
All of which puts the future financial security of a military family in question.
As noted earlier, it’s often tough for military caregivers to continue to work.
Nearly 60% aren’t working at all, 27% work full-time and the remaining few
fall in-between. As the years pass, the situation gets harder, not easier, and
many caregivers leave the workforce entirely. Not working makes it more
difficult to save for retirement. Two-thirds of caregivers over 40 say their own
retirement plans are in flux as a result. And half have had to cancel or
postpone plans to go back to school. All in all, to say the situation is difficult is
a massive understatement.
Unfortunately, these are not problems that can be solved with a few words
on a page (or a tablet). But what I’m going to try to do with the remainder of
this chapter is help you move in the right direction. Research has shown that
caregivers are particularly frustrated with two things regarding their finances:
They’re not sure what steps to take; and they’re not sure where to find
reputable help. Specifically, 87% don’t know what the VA has to offer and 69%
don’t know where to turn to find financial assistance. I’m going to give you
some general tips culled from caregivers with experience in this area.
Then I’m going to point you to one fantastic—free—resource. It is a step-bystep financial guide for caregivers developed by the Elizabeth Dole Foundation
and the Military Officers Association of America. As the leader of the project
explained to me, the guide is the product of six focus groups with 30 people in
the room at a time—half caregivers and half subject-matter experts. The goal
was to hear the concerns of the caregivers and produce a resource to make
their lives simpler.
It does.
It takes you by the hand from the point at which you become a caregiver
(when your warrior is still likely active military and you are under the auspices
of the Department of Defense) through your transition into what is often
lifelong caregiving (where your affairs will be handled by the Veterans
Administration). It runs down what benefits you—and your warrior—can expect
from the DOD, VA and Social Security. And it entails a comprehensive look into
the financial (budgeting, retirement, insurance) and legal (wills, trusts, powers
of attorney) “i’s” you have to dot and “t’s” you have to cross. You can find it
As a military caregiver, dealing with the finances means doing several things
we’ve talked about in prior chapters: Getting on and staying on a budget,
saving for short-term emergencies and long-term goals, and protecting your
family with insurance and an estate plan. As a caregiver, you have to approach
all of these things slightly differently than someone without this responsibility.
Should you read the other chapters on these topics? Sure, but be certain to
factor in the advice here as well.
Prepare for a gap in income: Becoming a caregiver almost always
means adjusting to a significant gap in pay. Some three-quarters of
military families rely on two incomes. When one of those people steps
back from full-time work to become a caregiver (whether you’re a spouse,
a parent or tied in some other way), you lose that income either partially
or completely. You also never preserve 100% of the military salary.
Depending on how severe a disability is, how retirement is processed and
where you’re located, retirement pay will be—at best—75% of pay before
retirement. There may also be a delay between the last active-duty
paycheck and the first in retirement.
Redo your budget/spending plan: Not only is becoming a caregiver
usually accompanied by a loss of income, it may come with an increase in
expenses—in other words a one-two punch to both sides of a budget. It’s
key to get a grip on this immediately. Caregivers call this “the imperative
of reducing living expenses,” and it essentially means taking the budget by
the horns and slashing proactively wherever you can. Most families will
move, explains MOAA Director of Transition Services Jim Carman. If you
are living on base, you’ll have between 180 and 365 days to move out of
government quarters. Consider your extended family when making this
decision—having them nearby is best. They can be a huge source of
support—emotionally, physically and sometimes financially—for your
family in transition.
Create a crisis plan: What happens if something happens to you? Not
long-term, but immediately. You need to script instructions—and
essentially create a document that gives someone else (and preferably
also a successor to that person) the authority to walk into your house and
take charge. That person should have power of attorney should something
happen to you (talk to your lawyer or the JAG Corps about that). This
document should also lay out who the important people in your life (and
your veteran’s) are: doctor, lawyer, accountant, etc. And it should spell out
in detail your veteran’s wishes should you not be around to provide care.
Will another relative step in? Is a move to an assisted-care facility in
order? Again, the MOAA has done an excellent job of creating a fill-in-theblanks Caregiver Checklist you can use for this purpose. Download it here
and use it.
Reconsider your life and disability insurance needs: If you are a
caregiver, chances are you need to purchase a substantial life insurance
policy in case something happens to you. Why? Because the value of the
services you provide to your veteran are likely quite expensive. If you
were not around, or able to provide those services, someone would have
to be hired (or quit his job or reduce her hours) to provide them, and the
purpose of the insurance policy is to fund that. Similarly, if your veteran is
not able to care for any children in the family, someone would have to be
hired to provide those services. The bills add up quickly. A level premium
term life policy, put in place for 20 or 30 years, is likely going to be your
best bet. It’s significantly cheaper than permanent life insurance and if you
get toward the end of your term and still need it, you can look into
converting all or part of it to a permanent policy. The same logic applies to
buying a disability policy of your own. Unfortunately, disability insurance
can be quite expensive. If you are working outside the home, look into
buying a group policy through your employer.
Establish a file of legal documents: Going hand in hand with your crisis
plan, you need the following legal documents. Keep one copy of this file at
home and another in a safe-deposit box at a separate location or in the
office of your attorney. It’s a good idea to review these every three years
—or, in the event of a major change in your life (birth of a child, divorce,
etc.), to keep them up to date.
Durable power of attorney
Health-care proxy (medical power of attorney)
Health Insurance Portability and Accountability Act (HIPPA),
Living will/DNR orders
Certified copy of military medical records
Medical Evaluation Board/Physical Evaluation Board or Integrated
Disability Evaluation System ratings
VA disability ratings or pension letter
Social Security disability award letter
Declaration of a VA fiduciary
Declaration of Social Security representative
Birth certificates
Marriage certificates/divorce decrees
Consider a support trust: Should something happen to you, you need to
be sure that your veteran’s assets are protected from third parties that
might swoop in and take advantage. The money that comes in needs to
be managed—as you have managed it—to provide a continuing quality of
life for the person you’re caring for. If you’ve left a life insurance policy as
well, those proceeds need to be invested. If there is no one in the family
able to handle this sort of financial management (including taking taxes
into consideration), think about hiring a professional; the fee for this is
generally 1% or so of the assets under management. If you do name a
member of the family as trustee, name a professional successor as well
who could step in if/when the family member is unable or unwilling to
Revisit your retirement scenarios: Once you have caregiving
responsibilities you need to look at how they impact your retirement plans.
For example, although you may be receiving caregiver pay from the VA,
that money is considered a stipend, not ordinary income. It doesn’t count
toward your Social Security credits, nor does it allow you to make a
contribution into an IRA. That may set you back significantly when it
comes to saving for retirement—and may force you to look at other
sources of care so that you can go back to work at least part-time to fill in
the gaps. You also—caregivers say—need to look at what happens without
your veteran in the picture. If you’re a spouse providing care, if your
veteran passes, you may lose multiple income streams (VA disability pay,
Social Security pay, VA caregiver pay). If those were to go away, what
would your remaining income stream look like? What are your options for
going back to work? How would that impact your retirement plans?
Similarly, if you’re a parent, have your caregiving responsibilities cut the
amount that you’ve been able to put away for your own retirement—or
forced you to make withdrawals? Every scenario is different. But the
sooner you can sit down to make an actual financial plan, the better
chance you have of following it.
Get the right tax help: It’s important to make sure you’re filing, not only
accurately, but in the most beneficial way for your household. The
confusing element is that some pay is taxable, other pay is not, and when
you’re a caregiver, between you and your veteran, the number of income
streams makes filing your taxes a complicated business. Bottom line, you
need a tax preparer who is knowledgeable about the military. Ask on the
closest base to cull recommendations. (Note: This is true, by the way, for
non-caregivers as well. Re-upping with the military can come with a
significant check, and you want to be sure you’re making the most of it.)
Involve the veteran in the budget and financial situations: So
many times spouses or caregivers just make all of the decisions without
looping the veteran in. That may seem like the easier thing to do, but it’s
likely to lead to all sorts of resentments down the road. Sit down once a
month and talk about what’s going on with your finances with the
intention of making decisions as a family.
The MOAA guide goes into great detail on how to be sure you and your veteran
get all of the benefits to which you are entitled. But here are four sources of
income that all too often go untapped.
For active duty caregivers: Special Compensation for Assistance with
Activities of Daily Living, or SCAADL, from the Department of Defense
Service members become eligible for this if they have a catastrophic illness
or injury in the line of duty and are then certified by a physician to need help
performing the personal functions of everyday living (eating, bathing, dressing,
toileting, etc.). The amount received—which is paid directly to the service
member rather than to the caregiver—is based on the cost of a home health
aid in your area and the amount (in time) and complexity of care you provide.
Benefits continue for 90 days after your service member’s discharge date.
You can find an online SCAADL calculator here.
For primary caregivers of veterans: VA Primary Family Caregiver stipend
You are eligible for this if you are the primary—i.e., the one designated—
caregiver for an eligible veteran enrolled in the VA’s caregiver program. The
amount you receive is based on the number of hours of care required during
the month (a decision made by the veteran’s medical team) up to a maximum
of 40 hours of care per week and the cost of a home health aide in your area.
Pay is a stipend, not income. It is not taxable, but it also doesn’t count toward
your Social Security credits or make you eligible to make an IRA contribution.
To designate a primary caregiver, download a copy of the application at
For more information, go to www.va.gov/hac or call 1–877–733–7927.
For the needs of older disabled veterans (with injuries or illnesses
not caused in the line of duty): Aid & Attendance pensions and
Housebound pensions
There are two types of VA pensions available that can help pay for
unreimbursed long-term care needs, including home care, assisted living or
nursing home services, for those whose need for care is documented by a
physician. The benefits can also be used to pay an adult child (but not a
spouse) or professional for at-home care. These pensions are available for
honorably or generally discharged veterans who had 90 days or more of active
military service (at least one day of which was served during official wartime,
though not necessarily in combat). The home care provider does not have to
be VA certified and assisted living facilities and nursing homes do not have to
be VA certified. These pensions are also available to surviving spouses of these
veterans, as long as they were married for at least one year at the time of
service and have not since divorced. Note: There is a cap on the income you
can have in order to qualify for these programs. You can find them here.
In 2010, the Family and Medical Leave Act (FMLA) was extended so that family
members of service members with a serious injury or illness (one incurred in
the line of duty on active duty, or one aggravated by service in the line of duty
on active duty) are permitted up to 26 workweeks of leave within a 12 month
period. Unfortunately, this leave is not paid. Eligible family members include a
spouse, son, daughter, parent or next of kin.
Your Financial Mission
As I noted at the beginning of this book, the finances of service members and
military families are different. But the endgame is not. The goal—financial
security, for yourself, your spouse, your children—is universal. It’s something
we all want. And if we can attain it, we can live happier, less stressful lives.
But as we all know, financial planning can get overwhelming. There seems
to be so much to do and often not enough time to do it all—and as a result we
don’t do anything. I don’t want you to get stuck in that way. To help you get
started, I’ve created a to-do list from information found in the chapters of this
book. If you need more detail on any of the items on the list, you can refer to
the original material. But for now, what I want you to do is just dive in.
Complete the first item on the list then move onto the next. With each one you
check off, you should feel a well-deserved sense of satisfaction. You’re that
much closer to taking control of your financial life.
Set three goals: Ask yourself, “What do I want my money to do for me in
one year, five years and 10 years?” Perhaps in a year, you want to have
paid off your credit card. In five years, you want to own a house? In 10
years, you want to have six figures put away for retirement. If you have a
spouse, do this together. Talking about our goals helps strengthen our
resolve when it comes to actually attaining them. Find pictures that are
representative of your goals and put them where you’re likely to see them
(as a screen saver on your computer, perhaps). Why does this step come
first? Because as you’re taking the steps that follow, you’ll sometimes ask
yourself: Why am I doing this? Is it worth it? Focusing on the endgame can
help you remember that it is.
Start tracking your spending: It’s tough (if not impossible) to live
within a budget if you don’t know where your money is going right now.
Once you see your cash flows you can start to make changes regarding
where you want your money to go, and how you’d rather utilize your
resources. But you need to have the information first.
Conduct a bill audit: Want to feel like you’re making progress? One of
the best things you can do is make a few calls—to the cable company,
your cell phone company and your credit card companies. Ask the first two
to “audit” your bill and see if they can find any savings. To light a fire
under them, tell them you’re being wooed by competitors in the area. With
your credit card companies, ask for a reduction in the interest rate. Tell
them a similar story—you’re getting offers for other, less expensive, cards.
It’s amazing how much money you can save in a few minutes and, best of
all, you save it every month.
Increase the amount you’re saving by 2%: And make sure those
dollars actually get into savings by setting up automatic transfers. You can
do this whether you’re saving through the Thrift Saving Program, putting
the money into an IRA or other retirement account, or building an
emergency cushion at your local bank or credit union. If, a month from
now, you realize you didn’t even notice the 2% was missing, increase your
savings by another 2%. If it’s harder to stomach, do it again six months
from now. Then keep going until you’re routinely socking away 10–15% of
what you take in.
Review a credit report: Go to AnnualCreditReport.com and look at a
credit report from one of the three major credit bureaus. Review it
carefully for inaccuracies or mistakes.
Find out your credit score: If you’re on an installation with a financial
office, you can typically get one there. If not, the website
www.creditkarma.com will provide one for free. If your score is 720 or
better you’re in great shape. If it’s lower, focus on paying down high rate
credit card debt and paying your bills on time, every time.
Use the worksheets: At my website, you find a Nest Egg Calculator to
figure out how much you’re likely to need for retirement and whether
you’re on track. If you’re not, discuss with your spouse ways you can cut
costs, reduce bills, increase income and funnel more into savings. Also use
the worksheet in Chapter 8 (LINK TO CHAPTER) to figure out how much
life insurance you need, how much your spouse needs, and whether you
have it. If you don’t have it, go online to a site like Accuquote.com to start
pricing out term insurance policies.
Have “The Talk:” Military families are more likely to have done this than
most—because of the dangerous situations they routinely face. But every
couple of years (even if you’re not in line for deployment, or even if your
military career is over), you’ll want to talk about what if: What if
something were to happen to you? Where are the important papers? Who
needs to be called? What do you want as far as life support or care? It’s
not pleasant, but it’s necessary.
Get help if you need it: Finally, if all of these steps seem too daunting,
you need help. Start by locating the FINRA fellow (military spouses trained
by the Financial Industry Regulatory Authority) to be financial counselors
by the Association for Counseling and Planning Education (AFCPE) on your
installation. He or she can give you the counseling you need. The
counselors affiliated with the NFCC—the National Foundation For
Consumer Credit—which you can find at www.debtadvice.org are also a
solid bunch.
And that’s it. I hope you found the information, tips and resources in this ebook helpful. It was designed to not only put your mind at ease about what
can be a difficult—and, sometimes tedious—topic, but to put you on the path
to that more secure financial future. If you know others whom you think would
benefit from this information, please forward them the link to the free
download. And if you have feedback, questions or comments, I’d love to hear
them, so please contact me.
Again, thank you so much for taking the time to focus on your finances. And,
above all, thank you for your service.
About the Author
Jean Chatzky, the financial editor for NBC’s TODAY show, is an award-winning
personal finance journalist, AARP’s personal finance ambassador, and a
contributing editor for Fortune magazine. Jean is a best-selling author; her
eighth and most recent book is Money Rules: The Simple Path to Lifelong
Security. She believes knowing how to manage our money is one of the most
important life skills for people at every age and has made it her mission to help
simplify money matters, increasing financial literacy both now and for the
future. In April 2013 Jean launched JEAN CHATZKY’S MONEY SCHOOL, a series
of college-style, interactive online personal finance courses that give men and
women across the country the opportunity to learn from and interact directly
with her. Jean lives with her family in Westchester County, New York.
For more information please visit www.jeanchatzky.com.
Almost every book is a collaborative process. This—for me—was more than
most. Although I came to it with years of experience in the world of personal
finance, I had very little exposure to the military. I was afraid of putting my
foot in my mouth with an inaccurate (or worse, inappropriate) turn of phrase.
Ryan Guina of The Military Wallet and J.J. Montenaro of USAA were hugely
helpful. Also, I really appreciated the essential feedback from Noeleen Tillman,
Stephanie Himel-Nelson, AnnaMaria Mannino White, and Melissa Bird of Blue
Star Families throughout the writing of this book. Each of these important
organizations made countless suggestions and for that I’m very grateful.
also relied on a number of incredibly knowledgeable sources including Keith
Gumbinger of HSH.com, Terry Howell of Military.com, James Lander, director of
Military Saves, Terri Taniellan of the RAND Corporation and Admiral Cutler
Dawson of the Navy Federal Credit Union. The FINRA Foundation’s Bud
Schneeweis graciously shared his in-depth research.
A number of military families told us their stories and opened the doors on
their financial lives. They include: Cari and Bryan Lingle, Cathleen and Dean
Smith, Tiffany and Chris Hays, Tracey Sammons, Easter and Adam Christopher
and Cherie and Tim (who asked to be identified by first names only.) A special
shout out to Jessica Allen who is the primary caregiver for her husband, Chaz,
and, as a FINRA Fellow, helps other military personnel with their finances. You
are a rock star.
Arielle O’Shea has been my right arm for the last six years and worked
tireless on the research and compilation of materials for this book as she has
for so many others. Kelly Hultgren, the newest member of my team, stepped in
to fact-check and make sure the links were accurate and in place. And what a
pleasure it was to work with former NBC producer Janice DeRosa on the
videos. It took me back many years to my early days on Today. It was such a
pleasure to work with the crew of professionals from Center City Film & Video
including Megan Taylor, Jakkie Krinick, Alberto Santiago, Anthony Massey,
Pedro Cunillera, Patrick Phelan, and Doug Kochenback. Thank you, too, to
editor Lisa Chambers who had my back where matters of copy were concerned.
This project is the second in a series of free eBooks for veterans and military
families produced by NBC and sponsored by Citigroup. A huge thank you to
NBC’s Cheryl Gould, Val Nicholas, Peter Costanzo, Michael Fabiano, Raneshia
Smith-Duke, Steve Chung, and Marian Porges. It would never have come
together without each of you. And from Citi, my appreciation to Bob Annibale,
Natalie Abatemarco, KC Choi, Marshall Sitten, Jamie Alderslade, Riva
Froymovich, Alexis Marlin, Elena Ponds, and Michael E. O'Neill.
I hope to see more projects like this in the future.
Also Available
NBC News and Citi are proud to bring you Heroes Get Hired, a free book that
sheds light on the specific strengths and competitive advantages that you as a
veteran bring to the civilian workforce, and how you can make sure to
communicate these qualities to a recruiter or potential employer. To download
a copy or read online, please visit http://www.heroesgethired.com.
© 2014 Jean Chatzky
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any
means, electronic or mechanical, including photocopying, recording, or any other information storage and
retrieval system, without the written permission of the publisher.
Enhanced Edition produced by Janice Derosa and Peter Costanzo
Cover Design: Deena Warner Design
eBook Design a nd Production: India Amos and Peter Costanzo
ISBN 978-1-938069-14-7 (ePub edition)
ISBN 978-1-938069-15-4 (Mobipocket edition)
ISBN 978-1-938069-20-8 (enhanced ePub edition)
ISBN 978-1-938069-21-5 (enhanced Mobipocket edition)
Published and Distributed by