By Laura Royer
Personal Finance Managers (PFM) working with military families need to know about options for their clients who are dealing with overwhelming debt. If you are working with families who are dealing with financial hardship or are knee-deep in debt, they may need to create a specific emergency debt pay-off plan to include a prioritization of which debts to pay first.
When a client doesn’t have enough money to pay all of their credit obligations, he or she may need to make some difficult financial decisions. It is important for clients to realize that when income is reduced, changes in spending must be made. The sooner these changes are made, the more likely financial problems can be addressed.
Create a Crisis Budget
Working with clients to create a crisis spending plan will identify all of the family’s income sources and necessary expenses. It is best to include the entire family in the decision-making process since cooperation from all family members will be essential to carry out any plan. If there are any expenses that can be temporarily paused, this is the time to do it. For example, families can pause gym memberships, and minimize hobby expenses or entertainment costs. This spending plan should only include expenses that the family needs to still pay no matter what their financial situation is at the time.
Track Family Spending
Next, have the family track their ongoing spending to verify that the expenses identified in the spending plan are accurate. A common mistake people make with managing money is that they do not accurately budget their money because they do not know how much money they spend.
Tracked spending should include an assessment of fixed expenses (items the family is committed to paying) and flexible expenses (items that the family may need but has more control to change).
- Conduct a review of at least two months of bank statements. Also, review all credit card statements to identify the continued usage and types of expenses.
- Separate expenses into categories that align with the spending plan and add up totals for each category.
- Then compare the totals with what the family says they plan on spending to be sure the amount allocated is an accurate reflection of how they spend money.
Three Ways to Fix a Financial Crisis
Once a spending plan has been created to accurately reflect the family’s financial needs, it’s time to take steps to fix the financial crisis.
There are only three ways to fix a financial shortage:
- Decrease expenses
- Increase income
- Decrease expenses and Increase income
The easiest fix is often to minimize or cut any unnecessary spending. Therefore, once all expenses have been confirmed, determine which expenses can be adjusted or eliminated based on necessity.
Refer clients to resources and ways to reduce expenses that will help them cut costs as much as possible. Some great resources that help address specific types of expenses are:
Once the family has minimized all unnecessary expenses, look for ways to generate income. This could be selling unwanted or unused items on the Facebook marketplace or having a garage sale. Another way could be utilizing one’s skill set to generate extra income from freelancing or sub-contract work. Have the client create a list of ideas he or she can think of that will help bring in some extra income. Be aware of potential income tax considerations when generating extra income.
Stop Using Available Lines of Credit
Before finalizing the spending plan during this financial crisis, if at all possible, the family should stop using the available credit to incur more charges or debt. Oftentimes, when families encounter a financial crisis, they will use credit cards to supplement income. This will only make their situation worse and may make the creditors less willing to work with the family.
Seek Assistance if Needed
If the family needs financial assistance, help the family look for financial assistance programs specifically designed for those in the military or for veterans. One resource that can help with active duty is the Servicemembers Civil Relief Act (SCRA). This Act offers protection for members on active duty status when dealing with issues like financial matters, rental agreements or evictions, security deposits, credit card or mortgage interest rates, civil judgments or tax payments, and much more.
Additional Assistance for Military Families
- Army Emergency Relief
- Coast Guard Mutual Assistance
- Air Force Aid Society
- Navy-Marine Corps Relief Society
- Servicemen Civil Relief Act
Additional Resources for Managing Money in a Crisis
- Cutting Back and Keeping Up When Money is Tight (PDF)
- Financial Resources to Help Get Through COVID-19
- Dealing With a Drop in Income (PDF)
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