Update: I have completely revised this article to account for the expiration of the 2010 Making Work Pay Credit.
Okay, I can hear the screaming already. “What pay raise?” “1.4% isn’t much!” “That will barely pay for how much gas/rent/utilities/food costs!”
I get it. I hear you. My husband is receiving the same 1.4% that you are, and I know it isn’t much. On the other hand, it is a raise, which is more than most of my friends are getting this year. I’m not getting a raise this year. Let’s just leave the frustration behind and plan some useful steps for using that little bit of money to make a bigger impact.
First, a pleasant surprise. As part of the wangling over tax issues, Congress passed a 2% payroll tax “holiday” for 2011. What this means is that instead of paying out 7.65% of each paycheck in Social Security and Medicare payments, you will only pay 5.65% for 2011. This means that your take home pay will increase by 2% as fewer payroll taxes are taken out. Unfortunately, there is a 2010 tax credit that is expiring, so your withholding will go up. The 2011 payroll tax holiday is a larger amount than the 2010 Making Work Pay credit, so it should still be a net gain for most people.
Add this 2% to your 1.4% raise, subtract the larger withholding, and the paycheck is still looking a little bigger. Let’s not let that money slip into the daily spending budget but do something useful with it. The top five things I think you should do with this money are:
- Set up or increase your TSP contribution. Add some or all of those to increases to your TSP account. This is especially helpful if you are in a tax-free status.
- Purchase life insurance, especially if you don’t have life insurance on the spouse who does most of the childcare. Term life insurance isn’t expensive, especially if purchased through the Family SGLI plan, and it is an important part of a solid financial plan.
- Get renter’s insurance. If there is a fire in your barracks or rental apartment/house, you need to have insurance to replace your things. Even if all you needed to replace were your uniforms and clothes, that could be a lot of money. Then add in your iPod, cell phone, and other electronics. Renters insurance is cheap and very important.
- Build an emergency fund savings account. Start with $500 or $1000 as your goal so that you don’t have to use credit when emergencies occur. Don’t think that you don’t have anything that could be an emergency: What if your pay gets messed up? What if your car breaks down? What if there is an emergency at home and you need to fly home quickly? Emergencies happen. For an ideal emergency fund plan, set up an allotment to an inconvenient bank account. You won’t see the money before it comes in, and you won’t be able to access it when the urge to spend comes along.
- Pay off credit card or consumer loan debt. Paying off debt gives you a double boost: you lower your monthly payments and you decrease the amount of interest you are paying on the loan.
How much money are we talking about? Depending on your rank and marital status, it could be as little as $5 per month, or it could be over $100 per month. This isn’t going to make anyone a millionaire, but it could have a bit impact on your future financial stability.
Not sure how to calculate how much money you should expect? Take your 2011 pay rate and subtract your 2010 pay rate. This is the amount of your raise. Then take your 2011 pay rate and multiply it by .02 to find out how much you will be saving in payroll taxes. The Making Work Pay Credit tops out at $33 per month for a single taxpayer or $66 a month for a married couple. At the amount of your pay raise to your payroll tax savings, then subtract the lost Making Work Pay Credit ($33/$66 per month) to figure out the total increase that you should expect in your paycheck.
Take a few minutes today to plan for that money, and then take whatever steps you have planned. I promise you will see the benefits at the end of the year.