Contribution by Molly Herndon and Carolyn Bird
Digging out of a mountain of debt can seem like an impossible task, and many resist asking for help. Service members may feel anxious about their options or be unaware of the wide range of services provided to them on base and, increasingly, online. As a PFM you may ask yourself– how do I help a service member find the motivation to stick with a financial management plan? Over the next few weeks, we will be going back to the basics by outlining steps and strategies you can use to help your clients who are looking for financial guidance to get on track.
Step 1: Assess the Situation
The first step is to assist the service member in getting the finances under control by assessing the current financial situation. The service member, and you, must know what you’re up against before you can create a plan to get out of the cycle of debt. Using a net worth calculator
Depending on the specific circumstance, you may recommend your client consider consumer credit counseling, debt consolidation, refinancing or transferring balances to get a handle on existing debt. Each of these strategies comes with advantages and disadvantages. It is important that the client be aware of and ask the lender for an explanation of any increase in the number of payments and interest rates or fees. A clear explanation of costs or extended periods of indebtedness will help the client to evaluate whether the plan is in their best financial interest. Credit repair agencies often promise to remove negative credit information for a fee. Be sure your clients know that the only legal method of improving a credit score is through a history of on-time payments or the removal of false negative information. Steering clients away from credit repair agencies is good practice, saving your clients valuable time and hard earned money.
These initial meetings may be a good time to suggest creating a monthly budget tracker. Tracking every penny that comes in and goes out is the only effective measure toward changing spending habits. Providing clients with an easy-to-use worksheet, like this one, may help clients get started with this new habit.
Step 2: Find the Motivation
What’s really important is what happens after the service member leaves your office. One way to motivate might be to show just how much the debt truly costs. Using the credit card calculator on myfico.com, I experimented with a balance of $3,000 at an interest rate of 18 percent and payments of $75 a month. Guess what? This debt costs $509 a year! Before you run the calculator, ask the service member about favorite hobbies or something he or she would like to buy. Run numbers on the calculator and show the service member just how much the debt at minimum payments is costing them each year. Ask if they wouldn’t rather use that $509 toward that hobby or purchase.
Step 3: Recruit Your Team!
While PFMs are part of the service member’s team for financial fitness, the most important team member is the service member’s spouse. Discuss with the service member how he will discuss this with his spouse to get her motivated too. Ask about the spouse’s favorite things and help the service member devise an approach that rewards both of them for working together toward a financial goal.
These are just the initial steps in working toward financial freedom. Later we will discuss saving, investing, and raising financially fit kids. There are many approaches to debt solution. What strategies have you found works well in helping service members turn their financial situations around?