Sequestration: Financial Fitness Is Critical

stack of one dollar bills

With the looming budget cuts across the Department of Defense, servicemembers, families, and DoD civilians may face a higher risk for potential financial crises. 

Sequestration, which is set to kick in on March 1, it would mandate $500 billion in across-the-board defense spending cuts over 10 years in addition to $487 billion in cuts mandated over that period by the 2011 Budget Control Act. 

The budget cut will slash about a third from the armed forces with the remaining two-thirds taken from spending on modernization, compensation and readiness.  As many as 800,000 DoD civilians may be furloughed one day a week. 

"The biggest thing with the sequestration is the timing," said Douglas Armon, Army Community Services Personal Financial Readiness program manager. "If it does happen, it will happen within 30 to 40 days."

To alleviate any financial burden for service members and their families as they prepare for the changing economy, ACS and the Military and Family Support Center offers resources and educational tools designed to enhance your financial readiness and money-management skills. 

"We are here to help and willing to go any extent to help service members," added Armon. 

Armon stressed the importance of looking at expenses and living beneath one's budget so as to make the most out the budget. 

"If you have to take a 20-percent cut today, what is in your budget you cannot live without?" asked Armon.

With the 1.7 percent pay increase for 2013 and a 1-percent pay increase beginning 2014 under the proposed DoD budget, the pay increase will not keep up with the net inflation, said Armon.

"If each household income remains the same, but the cost of goods goes up, at some point a lot of service members and their families will turn to their credit card to off-set their spending," he said. 

According to Armon, it will not impact immediately, but we may see the price of goods increase in the summer.

"If people don't change their lifestyle, they will use their credit card to fund their expenses; and the long term effect is that they will remain in debt," said the Oregon native.

Robert Hill, financial readiness program manager, also advises service members to create a budget and try to stick with it. 

"Hold off on making larger purchases for several months, and pay off debt as soon as possible," said Hill.

To be financially fit, Hill recommends everyone learn how to budget within their means. He further added that it may be a struggle at first, but as long as you don't incur any new debt, you should be fine. 

Furthermore, Armon also recommends having three to six months of living expenses put into savings, for emergencies. If you are already saving, increase the amount.  "The easiest way to save money is to set it up on auto-pilot by setting up an allotment to your savings account," said Armon. 

Another way to save money is to look at your debt and assess your expenses. If you are able to break down each expense, you see first-hand what can be cut down. Also, if you don't have an obligation to a car payment or credit card, put the extra income into savings. 

However, if you are in debt, Armon recommends four strategies. 

  • First, pay off debt from lowest to highest amount owed. When a small debt is paid, put the money toward the next-highest debt.
  • Second, look at the interest rate - paying off the debt with the highest interest rate immediately; in the long term, this will allow you to save more money. 
  • Third will be the high-minimum-payment credit cards. By paying off the highest minimum payment, you will have more available cash on hand.
  • Fourth is a strategy Armon calls 'pain theory.' Paying off the debt collectors who are constantly requesting payment will alleviate stress.

Living within a budget does not have to be extreme. By making smart decisions and getting involved with the ACS and Family Readiness Center's classes to help establish a budget and how to invest, you can become debt-free.

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