By Laura Royer
Finding the balance between paying off debt or saving more money can be overwhelming for military families who may have limited income on top of deployments and relocations. While it may be tempting to focus on one or the other, it may be possible to both save money and pay off debt at the same time with the right plan.
Paying Off Debt
The first step to paying off debt is knowing what is owed. Service members should make a list of their debts including the lender’s name, the total amount owed, the monthly payment, and the interest rate. Before attempting to save any income, the service member should be certain the monthly payments are made on each debt. Carrying too much debt or defaulting on debt can negatively impact credit scores which are often reviewed for promotions and security clearances.
Setting goals and creating a plan for saving and investing should be done as early as possible in a Service member’s career. Both short-term and long-term goals should be evaluated, and investment opportunities should be considered to further these goals. Keeping in mind that debts may also need to be paid, the amount of money available for saving may fluctuate month to month.
Service members can participate in the Thrift Savings Plan (TSP) as part of the Blended Retirement System to boost their retirement savings. The Thrift Savings Plan is similar to the 401(k) plans offered by employers in the private sector. The TSP, a “continuous play” bonus after 12 years of service upon re-enlistment, and an annuity payment are all part of the Blended Retirement System that should be considered when setting up a savings plan.
Balancing Debt and Savings
With the understanding that both paying off debt and saving early in a career are extremely important, balancing both activities at the same time may be necessary. There are a few considerations to make when allocating money for each effort, however. For debts with high-interest rates, it is recommended that clients prioritize those debts over savings goals. The Service member will be paying more money in interest on the debt than they may be earning by saving it in an account.
Furthermore, if the Service member has an extremely high balance on a debt, their debt-to-income ratio will be high. This most likely is harming their credit score, even if they are making payments on time. A good credit score is important for the Service member’s career and opportunity for growth.
Because of these reasons, the balance between saving money and paying off debt is going to be different from one Service member to the next. Evaluating the amount of debt and the type of debt alongside the Service member’s earning potential and savings goals is essential, and there will be no single solution for all Service members. Each solution is uniquely based on that individual’s financial situation.
For more, check out these tips from the CFPB.
Photo by Karolina Grabowski from Pexels