By Dr. Jarrod Sadulski
Faculty Member, Criminal Justice, American Military University

Servicemembers typically receive a great deal of classroom and field training to help them gain the skills necessary to serve in their military occupational specialty. Although there have also been some progressive steps taken to train servicemembers in financial literacy, there is still a need for them to understand important financial concepts that will help them for years to come.

Servicemembers without Financial Literacy Often Targeted by Lenders

One of the most important concepts involves learning how debt can affect financial wellbeing. Debt is a cancer to financial freedom; however, servicemembers are often the targets of companies that know servicemembers have had limited training on properly managing their personal finances.

Military servicemembers are more likely to be targeted by creditors than their civilian counterparts, writes Samantha Reeves for the nonprofit Veterans United. She says, “Approximately 36,000 active members of the military have recently requested financial help due to large debt threatening to annul their clearances.”

Military ‘Discounts’ on Car Loans Increase Their Costs for Servicemembers

Many roads around military installations are lined with car dealerships that specifically target servicemembers with confusing, so-called military ‘discounts.’ Without an understanding of debt, too many junior servicemembers are at risk of having to make car payments that will financially strap them for years to come.

For example, the average national interest rate in the United States is 6.49 percent for a used vehicle. If a servicemember purchases a used car for $15,000 and takes out a 60-month amortized loan with payments of $293 a month over five years, that servicemember ends up paying an additional $2,605 in interest while the vehicle depreciates in value.

Credit Card Debt Higher among Servicemembers

In addition, Reeves points out that servicemembers typically have more credit card debt with higher balances than civilians. It is very important that servicemembers understand how revolving credit works. For example, credit card balances carried month-to-month are subject to extremely high interest rates that make paying off the loan a challenge.

According to ConsumerCredit.com, 91% of military families have at least one credit card compared to only 69% of the civilian population. A study by the National Foundation for Credit Counseling found that the average servicemember has three credit cards. Studies have shown that one in four families of military members have $10,000 or more in credit card debt.

Creditors are fully aware of the vulnerabilities of servicemembers to debt, due to their small income in the lower pay grades. They often add to their debt because they need money for frequent military PCS moves. Also, these financially illiterate servicemembers don’t understand how interest debt compounds, which makes it extremely difficult to crawl out of debt once the repayment cycle has begun.

Budgets May Not Be Fun, but They Are the Answer to Decreasing Debt

According to the Financial Industry Regulatory Authority (FINRA), 36% of servicemembers have difficulty paying their monthly bills. One of the most important concepts for military families to understand is that you cannot build wealth and financial security if your monthly bills are plagued with high-interest debt payments.

It is essential to avoid the debt cycle at the beginning of a military career. This goal can be accomplished by speaking with financial counselors who specialize in working with military families and creating a budget. When a comprehensive budget is followed, debt can be avoided and savings can grow.

Budgets should be written out and followed meticulously. A good budget will show the actual amount of money a servicemember has after deductions and how of that money is being spent each month. Finances can be easily tracked with a good budget spreadsheet.

Keep a Reserve Fund for Emergencies and Long-Term Purchases

Once a budget has been established, it is important to set aside funds for emergencies and long-term purchases. For some military families two separate savings accounts might be the answer. One savings account should contain enough money to cover unexpected events that could arise. That fund could be used if the refrigerator needs repairs or a home appliance unexpectedly must be replaced.

The second account could be either a savings account or a brokerage account with a set amount of money sent each pay period to that account. Even if the monthly budget allows for only a small sum to go into this infrequently used account, servicemembers who use this plan will be more likely to have money when it is needed.

Avoiding debt and following a comprehensive budget can help servicemembers avoid common financial struggles. Coupled with long-term liquid and retirement savings, such budgetary steps can lead military families to financial freedom.

About the Author

Dr. Jarrod Sadulski has been with the Coast Guard since 1997. His expertise includes infrastructure security, maritime security, homeland security, contraband interdiction and intelligence gathering. He has also received commendations from the Coast Guard. Currently, Jarrod is a supervisor in the Reserve Program and provides leadership to Reserve members who conduct homeland security, search and rescue, and law enforcement missions.