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 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. In this article, we’ll provide the details on the 2024 pay raise, and we’ll discuss four ways to allocate your money to help enhance your financial and overall well-being. To talk specifically about your personal financial goals, be sure to reach out to your Financial Advisor.
What is the military pay raise for 2024?
This year’s military pay raise will be5.2 percent, making it one of the biggest annual pay raises in the last 40 years. Military retirees and disabled veterans will also see a cost-of-living increase of 3.2 percent in their monthly checks. The chart below was created with information from government data and shows military pay increases that have steadily trended upward. Annual pay raises for service members reflect increases in private-sector wages and are measured by the Employment Cost Index.
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 or the purchase of a new computer and diligently 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 Smart Ways to Put Your Money to Work
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. As you can see in the graph below, paying off a $5,000 balance at a 15 percent interest rate can end up costing closer to $7,000. Or consider a consolidation loan that allows you to lower your interest rate and further accelerate your efforts to eliminate debt. These options, either individually or in combination, enable you to utilize your military pay raise to thoughtfully and methodically pay off debt, and then repurpose that additional income for other objectives.
2. Increase your emergency savings.If COVID taught us anything, it’s that life is unpredictable. Building anemergency savingsaccount that will cover three to six months of expenses is a reasonable goal to give you a place to turn other than your credit card when unexpected expenses inevitably arise. By regularly contributing a portion of your pay raise, you can reach your emergency savings goal sooner rather than later.
3. Allocate more to retirement savings.If you participate in theBlended Retirement System, we recommend you allocate at least 5 percent to yourThrift Savings Plan(TSP) account in order to qualify for full matching contributions from the DoD. But even if you’re already contributing 5 percent or more and receiving the full match, using some of the extra money from your pay raise to increase your contributions is a good way to take further advantage of the tax benefits and long-term growth opportunities offered by both thetraditional and Roth versions of the TSP.
4. Plan for other long-term goals, such asbuying a house, fundinghigher education costs, or saving for a dream vacation. The funds in your TSP account can’t be withdrawn without a tax penalty until you reach age 59 ½, but your 2024 military pay raise can be used as the start of a savings program that is part of a comprehensive financial plan for pursuing all of your unique goals.
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 from too much deferred gratification. If you’re strategic about how you allocate your funds, you can not only plan for your future but also have some fun along the way.
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!
In 2024, military service members will see their biggest pay raise in two decades. Having a plan is essential in order to make the most of it. Consider these four ways to effectively allocate your pay raise and don’t forget to responsibly reward yourself and your family as you continue your financial journey.
Learn about the 2024 BAH increase here.
TSP funds have very low administrative and investment expenses, and low expenses can have a positive effect on the rate of return of your investment.
