After facing the ultimate challenges in uniform, Americans leaving the armed forces may have the financial odds stacked against them when returning to civilian life.
According to the Washington, D.C.-based FINRA Investor Education Foundation, military veterans are 40% more likely to be underwater on their home and 28% more likely to have made a late home payment in the past year than U.S. civilians.
In addition, veterans are "9% more likely to engage in problematic credit card behavior—like carrying a balance and being charged a late payment fee."
Those issues indicate why planning a smooth financial transition to civilian life is no luxury for U.S. military veterans—it's a necessity.
Money Moves for Military Veterans
"For those transitioning out of the military and into civilian life, now is the time to assess your finances," says Carlos Perez, former U.S. Army Colonel and the current Chief Operating Officer of the American Armed Forces Mutual Aid Association.
"Mandatory courses provided by the military services' transition assistance offices will help service members get started on a post-service budget. Service members need to take these courses and their budget seriously and take time to identify assets and liabilities, along with income sources and usage."
Aside from transition assistance (which is definitely a good idea), veterans can better transition into civilian life by being creative and focusing on these 8 personal money management basics:
1. Pay Down Debt
The more debt you have, the fewer options you have, says Tim Power, a U.S. Army veteran with 10 years of active duty. "Use extra pay from deployments or bonuses to help pay down debt," Power says. "I paid off $40,000 in debt in 17 months on an E-5 salary."
2. Prepare for Your Civilian Career
Your civilian job will be your financial engine after the military, Power says. "Start preparing for it at least a year out from separation. Job experience, certifications, and a security clearance are more important than any four-year degree." Civilian employers don't care about your rank, awards, or military education—they care about what you know and what you can do, Power notes. "Consequently, learn how to sell your value."
3. Focus on Taxes
One of the biggest financial shocks for transitioning from active duty is with taxes. "Active duty members enjoy some tax benefits that no longer apply and will result in a smaller net pay even if their salary is similar as a civilian," explains Ted Digges, executive director for veterans' affairs at The American College of Financial Services.
For example, monthly military "allowances" such as housing, subsistence, and overseas cost of living allowances are tax-free, but that's not the case in civilian life. "These funds often represent a significant portion of a service member's total income and once a tax is applied—even at the now lower rate—it can take a big bite out of take-home pay amounts," Digges says.
4. Get a Grip on Your Credit—Before You Leave the Military
Credit and credit card-related issues don't have to necessarily be an issue at transition. "If credit is an issue, it's often because the service member has not been educated on debt management or they have not built a favorable credit score while in uniform," Digges says.
"The key for transitioning members is to focus on cash flow by working up detailed income and expense projections, including those changes in taxes, so there are no surprises and they don't start a debt spiral that is hard to recover from."
Start that process by checking your credit scores and credit report before you leave the armed forces, and taking any necessary steps to fix report errors and pay any outstanding debt that appears on your credit report.
5. Mind the Gap From Military to Civilian Life
Service members should avoid actions while transitioning that might harm their credit profile, says Ortiz. "That's because they may need to be able to demonstrate sound credit at a time when their income is temporarily lower than usual, or even zero, as a result of being between jobs," he notes.
6. Weigh Your Home Cost Options
While serving, armed forces service members move frequently, notes Matthew Eads, a money manager at Eads & Heald Investment Counsel, and a graduate of the Virginia Military Institute. "It's important to carefully balance the costs and benefits of renting versus buying a home," he says.
"In most cases, it probably makes sense to rent if they expect to be moved again in two-to-four years. If they expect to remain in one location for five-plus years, then buying might make more sense."
7. Prepare an Emergency Budget
When separating from the service, make sure you have an emergency fund, or about six-to-nine months of a cash cushion for living expenses. "A job search might take longer than expected," Eads adds.
8. Take Advantage of Your Thrift Savings Plan
The U.S. military's Thrift Savings Plan (TSP) can be a big benefit even after you leave the armed forces. The plan can roll on and grow on a tax-deferred basis. Or, you can steer your TSP into your new company's 401k plan or individual retirement account. A trusted financial advisor can walk you through the process of properly managing your Thrift Savings Plan.
Merge Your Military Experience With Your Money Management
U.S. armed forces personnel transitioning to civilian life can expect substantial changes across the board, in terms of lifestyle, career tracks, and yes, personal finances.
Bringing the valuable discipline, habits, and training you learned in the service of your personal finances will help ensure your new life as a civilian is a smooth one—money-wise.