Financial fitness for law enforcement officers
The financial health of officers is extremely important to help reduce stress, alleviate ethical issues, maintain security clearances, and stop living paycheck-to-paycheck
By Matthew Loux, Faculty Member, Criminal Justice at American Military University
The financial health of law enforcement officers is extremely important to help reduce stress, alleviate ethical issues, maintain security clearances, and stop living paycheck to paycheck.
According to the Bureau of Labor Statistics, the national salary estimate of police and sheriff’s patrol officers is $58,720. That $58,720 is reduced by taxes, Social Security, Medicare, health and life insurance, retirement, and other allotments.
A 2013 survey by Bankrate.com, showed that 76 percent of people surveyed live paycheck-to-paycheck, only 35 percent of those making less than $75,000 have at least three months’ of emergency savings, and 27 percent of those surveyed had no savings.
There are ways for law enforcement officers to still prosper despite these statistics and includes:
- Creating a budget
- Jump-starting an emergency fund
- Starting a debt-reduction plan
- Retirement planning
- Life insurance
- Create a will
By taking some of these basic steps, financial freedom can be yours.
Create a Financial Budget
Everyone needs a budget to financially survive. I recommend a zero-based budget, which is a method of planning for each month or pay period. This method lists the income at the top of a sheet of paper and then adjusts the income by listing expenses that need to be allocated for until all the income has been depleted. I use a simple budgeting form in Excel, but you can use a notepad.
After the basic expenses such as mortgage/rent, utilities, food, and clothing have been paid, you should allocate the remaining income to other categories such as savings, retirement, college tuition, entertainment, etc. The zero-based budget forces you to allocate expenses based on needs, identifies possible expenses that are not necessities or can be eliminated, and forces you to continually evaluate your budget to reflect your life and determine what is really important.
If you are married, it is imperative that you and your spouse talk and agree on the budget so you do not become a statistic for divorce. The point is: You need a budget to tell your money where to go rather than your money dictating what you do with it.
Start an Emergency Fund
Emergency funds are critical to law enforcement because it gives a sense of security when the unexpected happens. Starting out with $500 to $1,000 in an emergency fund should be your first goal. Many law enforcement personnel work overtime and off-duty jobs to supplement their income. If you created a budget as described in the first section and your income meets or exceeds your expenses, then one of your categories should be savings to get you to the $500 to $1,000 emergency fund. Once that is set up, you can start to pay off your debt which is discussed in the next section. If you have no debt besides your mortgage, start putting any extra money into the emergency fund. You should have 3 to 6 months’ worth of living expenses in your emergency fund. Emergencies are just that, an emergency, it is not to be used when you need a new video-game system or a couch. I do not give investing advice so you should contact a reputable financial planner for those needs.
Once you have identified your debts from your budget worksheet, list your debt balances lowest to highest. Some suggest listing your debts with the higher interest first, but I prefer listing the lowest balances first so I can concentrate on paying those off first to give me a mental boost.
Once you have that initial emergency fund set up, use any extra money you earn from overtime, off-duty jobs, and selling items around the house to start paying down your smallest debt first. When it is paid off, apply that payment to the next debt, and repeat. It is called the debt-snowball and you will start to realize a weight lifted off your shoulders when you finally are debt free. I recommend using cash whenever possible because I have found that I spend less when I use cash and cut up those credit cards.
When I got my first job in law enforcement, I treated myself to a new car because I thought I deserved it after spending so many hours studying in college. Now looking back I realize that if I would have taken that monthly car payment and invested it, this is how things would have turned out:
- $2,000 or 166.67 per month for those 6 years at 12% would have been $544,622 at 57;
- $2,000 or 166.67 per month for those 6 years at 12% would have been $856,973 at age 61; and
- $2,000 or 166.67 per month for those 6 years at 12% would have been 2,661,629.69 at age 71.
That is the power of compound interest. The lesson learned is to invest early and let the money work for you. Make sure you do your research on the defined benefit plan offered by your department to know the amount of your retirement pension. You should also take advantage of your department’s retirement matching program if it is offered. Aspire to invest 15 percent of your income after you are debt free and have your emergency fund established. Let’s look at a couple of examples:
- You are making the average salary of $58,720 per year and invest 15 percent ($734 per month) from age 21 to age 57 with a 12% rate of return, that amounts to over $4.7 million (assuming there is no department match).
- If you think you do not have that much left after the debt snowball is completed, then invest half, or $367 per month for the same time period which will total nearly $2.4 million (assuming there is no department match).
- If you are one that says that is still too much, let’s take into account the matching contribution of your employer. If you can invest 5% ($245 per month) and your department matches another 5%, then investing $489 per month from age 21 to age 57, totals over $3 million.
That is some staggering retirement savings if you start early.
There is so much information out there concerning how much life insurance you need. Some experts say you should have 10 times your gross yearly income, but you should really create a life insurance plan based on your own needs.
A good rule of thumb is to list your debts first, then monthly expenses such as utilities, food, clothing, school items, entertainment, etc. If you created a budget as recommended in an earlier section, it should be easy. After that, add up your total debts that you would like paid off and with those monthly payments gone, you are left with your family’s monthly expenses to be covered without your income.
Let’s assume without a mortgage, car payments, credit card payments, and you fully funded your children’s education, you need to cover yearly living expenses totaling $42,000 ($3,500 per month). Simply divide $42,000 by .05 which totals $840,000 that will yield about $42,000 per year in investment income at a conservative 5 percent rate of return. The last step is to add the income replacement ($840,000 in this example) and the mortgage and loan payoff amounts (let’s use $160,000), then you will need $1,000,000 in life insurance coverage.
Create Your Will
Everyone needs a will and with the dangers involved in law enforcement, it is even more imperative that you have a will or trust in place. A will designates where your assets go upon death. Depending on your state, having a will in place may avoid probate that allows your assets to go where you wish, but some states still require you to go through probate and a will can make the process run more smoothly.
Having a will has several other benefits including guardianship of minor children, naming of executors to manage your financial affairs, inheritance disbursement, charitable donations, and in some cases limitation of estate taxes. You can download state specific wills online at www.legalzoom.com to get started, but I always recommend consulting an attorney in your state.
Financial stability and not living paycheck-to-paycheck is something most of us strive for every day, but we do not have a designated plan to get there. It is the will to survive that you use every day on the streets that you should apply to your financial and personal life.
Once you are debt-free and accumulating your retirement nest egg, protect yourself with life insurance, a will, and liability and disability insurance.
Life as a police officer is hard enough with shift work, daily police encounters, and marital and family issues. Please do not add financial pressures to the mix. Work with your spouse and family to communicate about your financial plan and goals, write them down, and follow through.
About the Author: Matt Loux has been in law enforcement for more than 20 years and has a background in fraud, criminal investigation, as well as hospital, school, and network security. Matt has researched and studied law enforcement and security best practices for the past 10 years. To contact the author, please send an email to IPSauthor@apus.edu.