Financial Planning for Law Enforcement Officers

Jul 29, 2022

law enforcement

A career in law enforcement is demanding and stressful enough in itself without adding the unnecessary financial pressures which lead many individuals to seek off-duty jobs and accept voluntary overtime when they would really prefer to be off duty. But by establishing a solid financial foundation with some simple but important measures now, you’ll make your hard-earned money work harder for you, and set yourself on a course of financial freedom and well-being for the long haul. Start planting the seeds of prosperity and financial health with this game plan designed around the unique needs and challenges of those who work in law enforcement:

Put a budget in place that works for you

Less than thrilled with the idea of completing a rigorous, detailed analysis of your income and expenditures only to learn that you’ll need to sacrifice your favorite activities to modestly improve your financial outlook? Yep, that doesn’t sound like a great deal to us either. According to Doug Wyllie of POLICE Magazine, a budget can be more helpfully thought of as a proactive plan to tell your money where to go, rather than viewing it as something restrictive, akin to a straitjacket. What’s more, your budget is fluid, and you can always alter it to better reflect your needs and goals.

Moreover, devising a spending plan aligned with your personal objectives doesn’t need to be an overly fussy, painstaking process that cramps your style. Free and secure online money management tools like MoneyTrac from The Police Credit Union make it simple to build a budget, and track and monitor spending, along with other helpful functions like the ability to manage debt, monitor investments and set financial goals. You can use MoneyTrac to set a budget for you and adjust it as you see fit, or set your own categories and spending limits. And if you’re looking for more help, POLICE Magazine recommends considering the online course developed by Jason Hoschouer, a Bay Area law enforcement veteran, financial coach and author of the book “Badges and Budgets.”

Start building an emergency fund

As we’re continually told, households should aim to have cash reserves of three to six months’ worth of living expenses in an account that is accessible, but separate from the one used for everyday purchases. A cash buffer like this can provide security and peace of mind for contingencies such as a job loss, long-term illness, unexpected vehicle or home repairs, major dental work, etc. With a healthy financial cushion in place, you can avoid debilitating stress and major financial setbacks that might otherwise occur in these circumstances.

However, the reality is that most people are well behind in establishing their emergency fund, and as FINRA (Financial Industry Regulatory Authority) reports, more than 50 percent have no emergency savings at all. But the good news is that even savings of $500 can help you avoid going into debt as well as provide a foundation for building your savings over time. Police1 advises saving $500 to $1,000 as an initial goal, and then focusing on paying down any non-mortgage debt. After you’ve cleared your high-interest debt, the next reasonable goal would be to continue funding your emergency account to the desired level of savings.

For an easier way to start building emergency savings, consider setting up automatic monthly transfers from your checking to your emergency account. Another option is to carve out a portion of your paycheck to have it deposited directly into a savings vehicle. What’s critical is that you keep your emergency fund separate from other savings accounts. A money market account is a good option as a safe place to grow your emergency savings because it is a liquid asset and usually offers a higher rate of return than a basic savings account. For more tips, check out our blog “Easy Ways to Fund an Emergency Savings Account.”

 

Work on eliminating your high-interest debt

If you carry a balance on your credit cards or have other high-interest debt, it’s wise to focus on paying this down once you’ve established initial emergency savings of $500-$1,000. Unsecured revolving debt like credit cards usually come with higher interest rates than other types of loans (e.g., personal loans, student loans, mortgages), and most have a variable APR. If you’re only making the minimum payment each month, your balance will continue to grow through compound interest (interest on interest). With money siphoned away each month to cover these interest charges, you’re losing out on opportunities to grow your savings or acquire assets that provide ongoing or appreciating value.

A highly effective strategy for tackling your credit card debt is to focus on paying it down one card at a time. Many experts recommend the top-down “avalanche” approach because it can mean paying less interest overall. With this method, you apply any extra money you can to your card with the highest APR first, while being sure to make the minimum payments on your other cards. Once this account is paid in full, move on to your credit card with the second-highest interest rate, and continue this process. Another plan of action, and one that can provide a quick psychological boost, is the “debt snowball” strategy. With this strategy, you target your credit card with the smallest balance first, then focus on your card with the next smallest balance, and so forth.

Taking action to reduce your credit card debt will not only save you money, but it may also significantly improve your credit score by lowering your credit utilization ratio. Put simply, credit utilization is the percentage of credit you’re using as compared to your credit limits, and it’s one of the biggest factors affecting your credit score. A few words of caution: in many cases, it’s best not to close your credit card accounts after you’ve paid them off, since this can adversely impact both the length of your credit history and your credit utilization. Lifehacker offers a quick read on this topic here.

 

Consider the advantages of life insurance

Life insurance can go a long way toward safeguarding your family’s financial security, and with the risks of law enforcement, it can provide valuable peace of mind. A life insurance policy provides a tax-free lump sum cash payout to your loved ones if you die unexpectedly, but some policies can also provide important benefits while you are alive as well. Although most individuals who are employed in law enforcement are offered some level of life insurance as part of their benefits package, you may find that the policy may not be adequate for you on its own, depending on your personal financial situation. To prevent financial hardship for your family in the event of an untimely death, it’s wise to fully investigate what’s available to you through your employer. and consider whether it makes sense to supplement it with an additional policy. Police officers generally have access to the same life insurance options as those in other occupations, although some insurance companies do charge higher premiums to those in high-risk jobs. For a helpful overview on this topic, check out “Life Insurance for Police Officers: What to Expect?”

 

Make sure you’re on track with your retirement planning

Retirement plans vary across departments and police agencies, but regardless of what your employer  provides, it’s essential to know where you stand and what course of action to take when it comes to building your nest egg. While some employers still offer law enforcement professionals a pension, it may fall short of meeting all of your retirement needs, especially if you don’t plan to transition to another type of work after your career in law enforcement.

Generally speaking, the best approach is to sit down with a qualified professional who can guide you toward the best options for your specific situation. The earlier you invest, the more time your money has to compound and grow to increase your net worth and protect your spending power from the erosive effect of inflation down the road.

As Police1 explains, it’s critical to research the defined benefit plan you have, and if your employer matches contributions, invest enough to claim the full match (it’s more or less free money after all).

After you’ve established emergency savings for three to six months of expenses and have paid down all of your non-mortgage debt, it’s generally advisable to start contributing more to your retirement account than your employer matches. According to Police1, you should aim to invest 15% of your income toward your retirement portfolio once you’re free of debt and have fully funded your emergency account.

If you want to further boost your retirement savings, you might also consider looking into additional tax-advantaged savings vehicles, such as a ROTH IRA or cash value life insurance[JH1] . But again, with any retirement planning decisions, it’s prudent to consult a certified professional who can provide guidance based on your overall financial situation and tax-planning needs. Also keep in mind that there are limits to how much you can contribute to a tax-advantaged retirement fund each year.

The Police Credit Union does not provide Tax, Legal or Accounting advice. Members should seek their own professional counsel in these matters.

Ensure that you estate planning wishes are well documented

In an occupation where you’re asked to put your life and personal safety on the line to protect the public, it’s especially important not to overlook the importance of having an estate plan that will allow for a smooth transition of assets. This would include but is not limited to items such as your will, living trust, and advance directive (a living will and durable power of attorney for health care). Be certain to document your current wishes with regard to your assets, as well as guardianship of any minor children. It’s also critical to keep any beneficiary designations updated, since designations for life insurance policies, annuities and retirement accounts will generally override your will or trust.

A revocable living trust can safeguard your money for your heirs and protect your assets if you become incapacitated or suffer cognitive decline. In addition, a revocable living trust allows your family to avoid the court-supervised process of probate, which is often very costly and delays distribution of assets until the estate is settled. Another disadvantage of probate is that it is a public process in which just about anyone can access details of your finances and how you want your property disbursed. If you have a living trust, information about your finances and your heirs can remain private.

When it comes to your estate planning choices, it’s highly recommended that you work with a professional with expertise in this area, such as a trust and estate attorney who specializes in drafting wills and trusts, granting powers of attorney and tax planning. Although a comprehensive estate planning package can get expensive, members of The Police CU throughout California are eligible for a significant discount for these services through our partnership with Affinity Trusts. Learn more at https://www.thepolicecu.org/estateplanning.

Also keep in mind that The Police Credit Union provides a valuable protection for active, full-time sworn peace officers and reserve officers throughout California. Our exclusive “End of Watch Debt Forgiveness Benefit” offers peace of mind and a financial safety net for the families of qualified fallen officers, at no cost to the member. Find details here

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