Four Ways to Make The Most of Your Pay Raise

We’ve all experienced it before. The initial happiness and enthusiasm that accompany a pay raise quickly fade as the extra money is swallowed up by our ever-escalating financial obligations. With inflation proving to be stubbornly persistent, that possibility is only heightened this year. That’s why it’s critical to have a purposeful plan for allocating these extra dollars in ways that address both your current and future needs and goals.

What is the military pay increase for 2023?

This year’s military pay raise is projected to be 4.6 percent, making it the biggest annual pay raise since 2007, and the third highest annual pay raise in the last 40 years. Military pay raises have been a part of America’s history since 1794. In 2022, the military pay raise was 2.7 percent. By contrast, 2023’s expected pay raise will be 4.6 percent. It is effectively the biggest pay raise in twenty years.

Are retired service members getting a raise in 2023?

Military retirees and disabled veterans will see their monthly checks increase by a whopping 8.7 percent for 2023.  This is primarily a function of responding to the erosive effects of inflation with a much larger than normal cost of living adjustment (COLA). The 8.7 percent increase is the largest since 1981.

Balance is the Key

At First Command, more than 60 years of helping service members and their families plan for and pursue financial security have convinced us of the merits of what we refer to as the 50/50 Plan. Its beauty lies in its balance and its simplicity. The idea is to allocate half of every pay raise to upgrading your current lifestyle and the other half to building a foundation for your financial future. For example, you could choose to save half of the extra money every paycheck for a vacation you’ve been dreaming about and apply the other half toward one or more of the following worthy objectives, depending on what makes the most sense in your current situation.

Four Ways to Make the Most of Your Pay Raise

1. Pay down debt. If you have high-interest-rate credit cards or other debt that is weighing you down, increase your monthly payment to reduce the amount of interest you are paying and retire your debt faster. You might also want to consider a consolidation loan that allows you to lower your interest rate and further accelerate your efforts to eliminate debt. In this way, you can utilize your military pay raise to thoughtfully lower debt.
2. Increase your emergency savings. If COVID has taught us anything, it’s that life is unpredictable. Building an emergency savings account with three months of expenses is a reasonable goal to give you a place other than your credit card to turn to when unexpected expenses inevitably arise.
3. Allocate more to retirement savings. If you participate in the Blended Retirement System, we recommend you allocate at least 5 percent to your Thrift Savings Plan account in order to qualify for full matching contributions from the DoD. Traditional and Roth IRAs also offer tax-advantaged long-term savings opportunities.
4. Plan for other long-term goals, such as buying a house or funding higher education costs. Your 2023 military pay raise can be used as the start of a savings program that is part of a comprehensive financial plan.

By dividing the extra money between the present and the future, you avoid the possibility not only of falling behind in the pursuit of your long-term goals, but also of growing resentful of too much deferred gratification.

Take Immediate Action

One more thing: it’s essential that you act immediately to implement your 50/50 Plan. Determine exactly how much additional after-tax income you will have in every paycheck after your raise becomes effective. Then, set up an allotment or bank draft to automatically direct the extra money to the appropriate accounts.

For example, if you decide to split the money between vacation savings and investing for retirement, that means increasing the amount of your allotment to the TSP and directing the other half of the money to a savings account. Just don’t make the mistake of sending the money intended to pay for your vacation to the checking account you use to pay all your monthly bills. If you do, you’ll be wondering what happened to the extra money six months from now!

Your Financial Advisor can help you allocate the additional funds from your raise as part of your overall financial plan. That way, you can feel good about saving for both a short-term win and contributing toward the goal of long-term financial security.