This story is presented by our sponsor, First Command.
More than 40 percent of people who took a Military Times survey on personal finances said it’s all right to spend at least half your monthly income on paying off credit debts and loans, on top of your rent or mortgage.
The 680 people who took the survey in mid-September — service members, spouses, veterans and retirees — showed they are generally savvy about their savings, credit scores and military benefits such as combat pay and re-up bonuses. But they were much less familiar with other aspects of personal finances, such as 401(k) savings plans and the Roth IRA.
The 42 percent of respondents who said it’s acceptable to spend 50 or even 75 percent of monthly income paying off credit cards and loans were missing the target by a wide margin. The recommended limit on those payments is only 20 percent of monthly income.
How would you do on the survey? Want to find out? Take the survey on this page, before you read any further. Answers are on the next page, along with a look at how the original respondents did.
Here are a few tips on managing your debt and and your savings:
Paying off debt
Getting rid of those debts is a step at a time, and here a few to think about.
• Pull your statements on credit cards, lines of credit, car loans and other loans, and add up your debt. Look at the interest rate you’re paying for each, on the line that says annual percentage rate or APR. Then look at the line that tells you how much you paid in finance charges last month.
• For at least two weeks, track every penny you spend and compare it with your income to see where your money is going. Then separate your spending into categories — rent, food, utilities, clothing, car payment, gas, eating out and entertainment. See where you can cut back, and consider shutting down spending on unnecessary things.
• Put those cutbacks toward paying more against your debt. For example, bring your lunch to work and use those savings to knock out some of the debt.
• Decide the best way to tackle the debt. Experts agree it’s best to pay off unsecured debt like credit cards before paying off cars and mortgages. Some say it’s best to tackle the credit card with the highest interest rate first, because you will save money by not paying the interest. Others say to tackle the smallest debt first because it motivates you when you see progress.
Put every extra penny toward paying off one credit card, while making at least minimum required payments on the other debts. Once one card is paid off, tackle the next debt, adding that amount of money to the minimum payment you were making on the next card.
When making those extra payments, always pay the interest charged from the previous month. For example, if you’re paying $300 extra on a credit card, and the interest was $54 from the previous month, pay $354.
• Pay every bill on time. That’s the key to improving your credit score, and to avoiding extra fees.
• Use the Servicemembers Civil Relief Act. If some of your debt was acquired before you entered active duty, you are entitled to have the interest rate on that debt reduced to 6 percent.
• Stop using the credit cards you’re trying to pay off. Pay with cash as often as possible.
• Check with your personal financial managers on base, or with the experts at MilitaryOneSource.com for some advice tailored to your situation.
Saving for retirement
If you’re in your 20s or 30s and think you’re too young to be saving for retirement, think again. Now is the time to be saving, to give your money time to grow by compounding the earnings. The older you are, the more you’ll have to save in a shorter amount of time to get to your goal.
Those in the military can participate in the Thrift Savings Plan (TSP), a retirement savings and investment plan similar to a 401(k) plan offered by private companies. In these plans, you can invest up to $18,000 in 2015, through automatic payroll deductions. (Those who are 50 and older can invest up to $6,000 extra this year in catch-up contributions.)
The TSP offers a variety of investment options that help you diversify the way you invest your money. Most advisers suggest that you put money into different types of investments so that you possibly reduce your risk and avoid “putting all your eggs in one basket.”
You can choose between two types of tax treatments for your TSP contributions:
•Traditional, where you don’t pay taxes on the money you contribute. So less money comes out of your paycheck. It grows tax-free until you start withdrawing money for your retirement, after age 59 1/2. You will be taxed on your withdrawals based on whatever your tax rate is at that time.
If you’re making tax-exempt contributions, such as from combat pay, your contributions will be tax-free and only the earnings from that contribution would be taxed when you withdraw it.
•Roth, where taxes are paid up front. The Roth TSP is similar to a Roth 401(k), not a Roth IRA, so there are no income limits for Roth TSP contributions. You don’t have to pay taxes when you withdraw the money, if at least five years have passed since Jan. 1 of the year you made your first Roth contribution and you are at least age 59 1/2, or permanently disabled. You wouldn’t have to pay taxes on contributions or earnings from combat pay.
You may have to pay a 10 percent early withdrawal penalty tax on any taxable part of a withdrawal.
When you leave the military, if you decide to roll over the money in your TSP, avoid penalties and taxes by letting your retirement plan provider roll it over to the custodian of your new retirement account.
For more information, including investment options, visit www.tsp.gov.
The survey
Answers are at the end, with a look at how the survey respondents did.
1. The U.S. military’s 401(k)-style payroll investment plan is called:
A. The Military Savings Plan
B. The Thrift Savings Plan.
C. The Federal Employee Investment Plan.
2. The U.S. military 401(k)-style plan:
A. Is tax free.
B. Is taxed up front, with tax-free payouts at retirement.
C. Is tax free up front and taxed with retirement payouts.
D. I can elect to pay up front or with retirement payouts.
3. A Roth IRA:
A. Is tax free.
B. Is taxed up front, with tax-free payouts at retirement.
C. Is tax free up front and taxed with retirement payouts.
D. I can elect to pay up front or with retirement payouts.
4. My credit score is important when seeking a loan:
A. To buy a house.
B. To buy a car or truck.
C. To buy a motorcycle.
D. All of the above.
5. The information on my credit report affects my credit score for:
A. 1-3 years.
B. 4-6 years.
C. 7-10 years.
D. For a lifetime.
6. My re-enlistment/service-extension bonus is:
A. Is counted as art of my annual income and factored into my taxes.
B. Is tax free only in designated combat zones.
C. Both of the above.
7. Army Emergency Relief no-interest loans, scholarships and other financial assistance programs are offered to:
A. Active-duty troops.
B. Dependents.
C. Retirees.
D. All of the above.
8. If you have $100 in a savings account earning 2 percent interest a year, how much
would you have after five years:
A. More than $102
B. Exactly $102
C. Less than $102
9. Excluding your rent or mortgage payment, your monthly payments for credit card debt, vehicle loans, student loans and other debts should not exceed what percentage of your monthly income?
a. 20
b. 50
c. 75
d. 90
10. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?
a. The one who pays at least the minimum amount each month and more, when she has the money
b. The one who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash
c. The one who only pays the minimum amount each month
d. The one who always pays off her credit card bill in full shortly after receives it
11. Which of the following could help improve your credit score?
a. Keeping your credit card balances below 50 percent of the total available credit limit
b. Paying your bills on time each month
c. Both of the above
12. John and Mary are the same age. At age 25, Mary started saving $167 a month, and John saved nothing. At age 50, John started saving $333 a month, while Mary kept saving $167 a month. When they are both 75 years old, who has the most money saved?
a. The same amount, because they put away exactly the same.
b. John – he saved more each month
c. Mary – because she saved more money
d. Mary – because her money has grown for a longer time at compound interest
Answers:
1. B
Of those who originally took the survey, 87 percent answered correctly.
2. C
Slightly more than half or respondents, or 54 percent, were correct, with 21 percent saying they could elect to pay up front or with withdrawals, 12 and 13 percent for the other options.
3. B
The Roth IRA works differently than the traditional 401(k), and 57 percent of respondents correctly said it is taxed up front with tax-exempt payouts in retirement.
4. D
This was easier: 99 percent nailed it, saying your credit score is important when getting a loan for any of those major expenses.
5. C
About a third of the survey respondents were uncertain how long they will be dogged by poor credit reports. Two-thirds responded correctly that your credit report affects your credit score for seven to 10 years, while 17 percent thought it would follow you for life, and a total of 16 percent think it will affect them for six years or less.
6. C
“Both of the above” is correct, and 85 percent of respondents got that.
7. D
AER is available to all categories; 71 percent responded correctly with 28 percent answering that only active-duty troops can use the emergency fund.
8. A
About a quarter of respondents don’t realize their savings will grow over time when it is earning interest. Your $100 will grow over five years as the interest accumulates, and 73 percent got that right.
9. A
A little more than half, 57 percent, know that their monthly payments for debt and loans should be 20 percent or less of their monthly income. Almost a third, 32 percent, said they could owe up to 50 percent of their income on these expenses, and 10 percent said 75 percent.
10. C
When it comes to finance charges on credit cards, 84 percent correctly said they will fork out the most if they pay only the minimum amount per month rather than trying to pay off more of their debt.
11. C
The vast majority of respondents, 94 percent, knew they can improve their credit scores by paying bills on time and keeping credit card balances at less than half of their available credit.
12. D
Mary has grown her savings over time and the compound interest put her in better shape than John, who started late, and 86 percent of respondents got it right. Nine percent said they would have the same amount in savings. A total of 5 percent were split between the other two possible answers.
Demographics for box:
The 680 people who took the Military Times survey in mid-September tended to be young adults, and more than half are active duty. Most have dependents.
Ages:
18-34: 58 percent
35-44: 22 percent
45-54: 11 percent
55 and over: 10 percent
Status:
Service members: 56 percent
Military spouses: 19 percent
Veterans: 12 percent
Retirees: 11 percent.
Rank:
Specialists: 15 percent
Sergeants: 14 percent
Staff sergeants: 14 percent
Sergeants first class: 9 percent
Captains: 5 percent
The remaining ranks responded in smaller percentages; no generals responded, and chief warrant officer 2 was the only warrant rank that responded, making up 1 percent.
Time in service
1-3 year: 16 percent
4-8 years: 16 percent
9-12 years: 12 percent
13-16 years: 9 percent
16-19 years: 6 percent
20+ years: 15 percent
Component:
Active: 53 percent
National Guard: 10 percent
Army Reserve: 7 percent
The remainder are spouses, veterans and retirees.
Marital status
Married: 74 percent
Single: 18 percent
Divorced: 6 percent
Widowed: 1 percent
Dependents
Two out of three respondents have dependents.
Note: Percentages may not add up to exactly 100 percent in some categories.
