Making the Most of Your Pay Raise
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Four Ways to Make The Most of Your Pay Raise

December 10, 2021 | 4 min. read

You don't have to choose between immediate gratification and your long-term financial health.

We’ve all experienced it before. The initial happiness and enthusiasm that accompany a pay raise quickly fade as the extra money seems to be swallowed up by our ever-escalating financial obligations. But there is a way to avoid that, and it’s by developing and immediately implementing a purposeful plan for allocating that additional money.

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 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 the other half towards one or more of the following initiatives, based on what makes sense for your 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.
  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 to turn to – other than your credit card – when the inevitable happens.
  3.  Allocate more to retirement savings. If you participate in the Blended Retirement System, we recommend you allocate at least five percent to your Thrift Savings Plan account to receive the full matching contributions. 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 financing higher education costs.

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.

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