According to a survey from the National Foundation for Credit Counseling and Pioneer Services, 55% of vets believe they aren’t prepared for a financial emergency. “Even those who get a well-paying job often find that losing their military benefits poses a strain,” says Eric Engquist, assistant vice president of military transitions at USAA.
Here are five money moves that will help protect you in a time of crisis.
While you’re still in uniform
1) Create a transition fund Many service members don’t think about the need to keep a cash cushion because they’re accustomed to a stable source of income, says Engquist. But there’s a good chance the post-military job search will take longer than you think. You should have enough to cover six to nine months of living expenses. Start by putting at least 10% of each paycheck into a liquid account, such as a money-market fund or high-yield savings account. If you own a home, apply now for a home-equity line of credit, which can be a good fallback source of cash and will be easier to qualify for while you’re still in the service.
2) Polish your credit A mediocre credit score (below 680) can hurt your ability to get a low-rate loan. A credit history littered with overdue bills can also hurt your job hunt, since some employers check reports as part of their hiring process. Active-duty military personnel and their spouses can get free copies of their FICO score (saveandinvest.org). Also check your credit report at AnnualCreditReport.com and fix any mistakes. Within a year, you should be able to improve your score significantly by reducing your debt and paying your bills on time.
If you’re deployed overseas, protect your credit report from identity-theft scams. Contact any of the three credit reporting agencies (equifax.com, transunion.com, and experian.com) and request an “Active Duty Alert” on your file. That requires lenders to verify your identity before approving new credit lines and removes your name from preapproved credit offers for two years.
3) Apply for a VA mortgage Ready to become a homeowner? If you don’t have the usual 20% down payment, you can buy a house with a loan backed by the U.S. Department of Veterans Affairs (VA). You’ll usually get a VA loan at a competitive rate—recently about 4%, similar to other bank loans—even if your credit isn’t perfect, and closing costs are likely to be lower than what you’d pay on a conventional or FHA loan. If you’re disabled, the government will also waive its funding fee, usually 1% to 2% of the loan. Most VA benefits don’t kick in until you’ve left the service, but you can apply for a VA mortgage while still on active duty (you generally need to have served for at least 180 days to qualify).
4) Make a budget The first civilian paycheck is often a shock, says financial planner Rob Aeschbach, who is also a retired Marine. Between tax-free exclusions for active duty and nontaxed benefits, such as housing and moving allowances, service members may have earned up to a third of their income tax-free. “When I got out of active duty, I landed a job that paid 20% more than what I was making, but I realized I actually took about a 10% pay cut,” says Phil Dyer, a Towson, Md., financial planner and former military officer. For help estimating how much you’ll need to earn as a civilian to match your take-home military pay, go to the pay calculator at gijobs.com. A good place for general financial advice is the “especially for servicemembers” section at the Consumer Financial Protection Bureau.
5) Buy life insurance Active-duty service members are automatically enrolled in a group life-insurance plan with a death benefit of up to $400,000 for uniformed personnel and $100,000 for spouses. You can convert that policy into a veterans group life insurance (VGLI) policy, which won’t require a physical. If you’re healthy, however, you may find that a nonmilitary policy is cheaper: A vet in his twenties would pay $32 a month for $400,000 in coverage. Meanwhile, for the same coverage a 25-year-old, nonsmoking male veteran from Texas with “preferred plus” health would pay $18 to $20 a month for a 20-year term policy, according to Jeff Rose, an insurance agent and author of Soldier of Finance. See rates at benefits.va.gov. AccuQuote is a good resource for insurance policies and more.
Read more of The Veteran’s Guide to Financial Success: