This year, many U.S. service members and their families will see extra room in their budgets thanks to a pay increase. Most military pay went up by 4.5%, with E1 through E4 soon to receive a 14.5% boost. That's what financial experts call a windfall -- an unexpected money gain. But what should you do with it?
Receiving extra money is always good news, whether it's a pay raise, inheritance or tax refund. Yet making the most of it requires thoughtful decisions, or at least it should. Here's what to do -- and what not to do -- to ensure your pay raise sets you up for financial success.
What to Do with a Pay Raise
When you get unexpected money, it can be tempting to spend it all on improving your quality of life with things such as vacations and nicer cars, but that's not the way to do it. You need balance -- a balance between paying bills and debts, saving for the future and improving your quality of life.
1. Pause and Process
Before rushing to spend, take a moment to let the excitement simmer down. There's no rush to make immediate decisions. You won't get a prize for spending it the fastest. Let your newfound money simmer in your checking account instead of burning a hole in your pocket. Allow time to process the excitement from the new funds to make a smart financial decision instead of an emotional one.
2. Pay Off High-Interest Debt
Use part of your pay raise to tackle high-interest debt, such as credit cards or loans. Reducing debt not only saves money on interest but also greatly reduces your stress. A balanced approach might be putting half of your raise toward debt repayment and the other half toward entertainment.
3. Boost Your Emergency Fund
A well-funded emergency savings account is at the heart of financial security. A good emergency fund goal would be to save six months' worth of living expenses, including rent, groceries and debt payments. Your raise can help you build this safety net faster.
4. Reach Your Savings Goals
If you're working toward specific goals, such as buying a wedding ring, funding education or starting a business, your pay raise can accelerate your progress. Consider putting the extra money into a high-yield savings account to maximize growth and get to your goals sooner.
5. Invest in Your Future
Investing part of your raise in retirement accounts, such as the Thrift Savings Plan (TSP), a 401(k) or an Individual Retirement Account (IRA), is a smart move. You’re not only saving for your future self; you’re also using compounding interest to make money on your pay raise. It’s turning your pay raise into financial freedom.
6. Plan for Taxes
Your pay raise might not put you into a new tax bracket, but you probably want to prepare for it just in case. Talk to a professional about tax planning so you aren't surprised by owing taxes next year. If that’s the case, you can make changes or save now.
7. Talk to a Financial Professional
If you don't know the best way to plan for your pay raise, talk to a financial professional. A financial coach or counselor can help create a game plan based on your unique financial situation. They will factor in your debt, income, goals and more. Many military installations offer free financial counseling, as does Military OneSource. Veterans can also access VetCents for support.
What Not to Do with a Financial Windfall
You can do some things with a pay raise that will not only take you further away from your goals but also make your newfound money disappear quickly. You want to avoid these things.
1. Avoid Impulse Spending
Resist the temptation to splurge without a plan. Creating a budget ensures your extra funds go toward meaningful goals rather than fleeting purchases.
2. Don't Make Risky Investments
Beware of "get-rich-quick" schemes or pressure to invest in things you don't understand. There is no shortage of people and organizations that financially prey on the military and veteran communities. Do your homework and research. Only invest in opportunities that align with your goals, the risk you can tolerate and investments you understand.
3. Get Comfortable Saying No
Military pay charts are public knowledge. If someone knows you’re in the military, they know you received a raise. Be careful about loaning money to friends or family without clear boundaries. If you don't have limits, who will help you if you need financial help in the future?
The Bottom Line on Windfalls
A pay raise or financial windfall is fun and an incredible opportunity to improve your financial health, but it requires thoughtful planning, not unchecked spending. Take your time, seek professional advice and strike a balance between enjoying the present and securing your future. With careful decisions, your windfall can be where financial security and freedom begin.
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