What To Do With Your 2016 Pay Raise

Money in a stack.

On Wednesday, President Obama signed into law the 2016 National Defense Authorization Act.  Amongst its many provisions, it provides for a 1.3% raise for most service members.  You can see the complete chart elsewhere at Military.com, but here I’d like to talk about what this raise means and what you should consider doing with that little bit of extra money.

1.3% ends up being a pretty small raise for most servicemembers; only a very few senior officers will get more than $100 more each month.  (Flag and general officer pay is frozen for the second year in a row.)  An E-4 with more than 4 years of service will see an extra $31 per month, an E-7 with 14 years service will have an extra $54 per month, an O-2 with 2 years of service will earn an additional $50 per month, and an O-4 with 10 years of service will bring home $87 more each month.

Obviously, these small amounts mean that the “what can you do with that extra money” question isn’t very exciting.  However, every little bit counts, and you’d be foolish to just let that extra money get absorbed into your regular spending.  (Goodness knows that is easy to do.)

Just Starting Out

If you’re at the beginning of building your financial foundation, the three smartest choices for your extra income are:

Building An Emergency Fund

An emergency fund is the most important key to good money management.  For military families, an emergency fund is extra important.  $500 or $1000 is a great start.  If you started saving a $50 a month raise in January, you’d have a $500 emergency fund before next Thanksgiving!

Pay Off Debt

Paying off debt is another high priority when you’re working on your financial life.  If you can add the amount of your raise to your regular debt payments, you can pay off those darn debts so much faster!

Save For Retirement

I’m a huge fan of the Thrift Savings Plan that military members can use for tax-advantaged retirement savings.  Even if you’ve never contributed before, use your raise to start contributing 1% to your TSP account.  Another great option is an Individual Retirement Arrangement (IRA,) including an IRA for any non-working spouse.

Making Progress

If you’ve already taken care of the three steps listed above, you can start thinking bigger. You can increase your emergency fund or retirement contributions, or start something new, such as starting a savings account for a specific purpose (such as a car replacement account) or contributing to a college savings program.

Stepping It Up

If you have a generous emergency fund, are maximizing your tax-advantaged retirement savings, don’t have any consumer debt, and have savings for mid-range goals like house or car purchases, it is time to start thinking creatively.  You might want to build up a transition account for when you leave the military, or pay down your mortgage, or explore non-retirement investments.

While the 2016 pay raise isn’t a lot, it is something and that money will just slip through your fingers if you don’t have a plan for how to use it wisely.  Pick a smart move based upon where you are financially, and put that extra cash to good use.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.