Setting a good example

Debt doesn’t discriminate

No. 1: Keep tabs on your bank.

No. 2: Never take out a payday loan.

No. 3: Ask questions before you get debt relief.

No. 4: Unleash the power of calculators.

No. 5: Think long and hard about cosigning loans.

No. 6: Teach your kids to control spending and debt.

Quick Clicks to Help with Consumer Debt

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No. 3: Ask questions before you get debt relief.

The FTC urges people to read between the lines of ads online and in newspapers that promise debt relief. Many such counseling agencies are nonprofit or low-cost organizations that will actively help, not siphon off your remaining assets, but in other cases the solution you will be paying for is bankruptcy — a drastic solution that stays on your credit report for 10 years and can put a roadblock in your plans to get credit, housing, insurance, and jobs. The FTC advises that you talk to your creditors instead and try to work out modified payment plans or seek help from a reputable credit counseling service that can act as a liaison between you and your creditors.

Sometimes, as the FTC also relates, what you’ve invested in your home can be an asset. But Joseph Whelan, chair of accounting, economics, and finance of UMUC’s undergraduate school, advises caution when considering home equity loans or lines of credit. “The major concern here is living within their means on a fixed income. Sometimes retired military personnel can tend to run up consumer debt at interest rates as high as 16 percent or 18 percent. In an effort to consolidate their high-interest debt, they might choose to do so through a home equity loan. Unfortunately, if these personnel can’t meet that payment over a period of time, they are at risk of losing their home.”

Firms that offer to “reduce your monthly payments” might consolidate your debts into one single payment. Be careful — while some firms can indeed make that one payment less than the sum of the payments you previously were making, they often do so by stretching out that loan for a longer period of time, making you pay more in the long run. MOAA’s online Financial Center has a personal debt consolidation calculator that will allow you to tell within seconds if a debt consolidation deal is right for you.

But don’t wait until you’re in financial trouble to get good advice, says Doug Terwilliger, adjunct associate professor, finance, of UMUC’s undergraduate school. “Consult with a CFP to review current finances,” he says, so you can see if your current debt might be derailing your financial plans. “[It’s] best to work with a CFP on a fee schedule—that way they’re working on their client’s behalf, not necessarily any company affiliation.”

No. 4: Unleash the power of calculators.

Online calculators are invaluable for making decisions, and MOAA’s Web Base provides many further resources. One decision that military personnel perennially face, for instance, is whether to invest in a house. The “Rent versus Buy” calculator factors in essential elements you otherwise might not have considered, such as points, inflation rates, and loan origination fees, to help you assess whether being a homeowner will help or hinder your economic status during the limited time you’re stationed in a certain place.

Other calculators on the site include general topics such as mortgage and other loan calculators; several online tools to allow you to pay down credit cards at an accelerated rate; and a new, exclusive MOAA-developed calculator to determine how much civilian pay you would need to make in addition to your retired pay in order to equal your current take home active duty pay.

No. 5: Think long and hard about cosigning loans.

By the time servicemembers reach retirement, they might feel they finally can breathe easy. “Probably at this stage of their lives they’ve bought most everything they need,” notes Whelan. But security and liquidity brings its own risks. “They might be inclined to help children with their cost of living,” he says, “and would be at risk of losing assets when cosigning loans.”

It’s common sense that you would only cosign on a loan for someone you trust, typically a close friend, or your child. It’s also common sense—but typically overlooked—that “when you’re asked to cosign, you’re being asked to take a risk that a professional lender won’t take,” says the FTC. “If the borrower met the criteria, the lender wouldn’t require a cosigner.”

The FTC has some sobering statistics on cosigned loans: Their research on certain kinds of lenders reveals that “when cosigned loans go into default, as many as three out of four cosigners are asked to repay the loan.” And in most states, if the person you’ve cosigned for misses a payment, the lender immediately can come after you without even trying to get the money from the original borrower. The lender can add late charges and attorney fees—charges that can multiply exponentially—if they have to sue to collect. And if the lender wins the suit against you for all those aggregated costs and you don’t have the cash to pay, they can take your wages and property. Bottom line: a cosigned loan can be one of the most expensive “small” consumer debts you can assume.

No. 6: Teach your kids to control spending and debt.

Jump$tart, an educational coalition of nonprofit organizations, for-profit supporters, and agencies of the federal government, recently ran a survey of high school seniors. About 58 percent said they learned the most about managing money at home (versus 19 percent in school, 17 percent personal experience, and 2 percent from friends).

“Parents need to realize that they are still the No. 1 source of their kid’s financial education,” says Laura Levine, Jump$tart’s executive director. What often holds back parents’ teaching, says Levine, is their own personal lack of knowledge about finance; and in that case, “this might be a good opportunity to learn together.”

To that end, Jump$tart provides free educational materials aimed at kids from age two through adulthood. One particularly useful tool is “How to Raise a Money Smart Child,” a parent’s guide that contains tips, data, and family activity ideas to educate both the parent and child about allowance, credit, budgets, and other financial issues. Like scores of other resources Jump$tart offers, it’s free—just click on “clearinghouse,” under “Resources.”

One good way to teach kids about finances is to play a game described by Neale Godfrey, author of 13 books on financial subjects. When asked by a family that was thousands of dollars in debt how they could get their kids to understand why they couldn’t afford certain things, Godfrey answered that the parent should bring their monthly salary in cash, put all the current bills to the kitchen table, and sit the kids down. Then they should identify each bill, and count out the money to pay it. After that, make a list of things for which there are no bills— contributions to church and charity, regular expenses such as laundry and groceries, recreation, and savings. When there’s more month than there is money, the reality can be more jarring—and meaningful.