The math of the raise

As I mentioned in a recent post, I got a substantial raise this year. After taxes, I’ll be getting an extra $600. (Like I said: Best. Boss. Ever.) So how do I make the best use of it?

Savings are great, and I definitely want to bulk those up. That said, there are at least two other major areas that could use some attention.

First, the IRA. Currently, it’s woefully underfunded. Given that we were relying for so long on unemployment, which could have run out at several points, we needed to focus on paying down debt over retirement. Especially since it wasn’t clear whether either of us would ever work again.

So I want to boost our contribution by $200 a month, effectively tripling it. (I told you it was underfunded.) It still means we won’t be maxing out even one contribution, but at least it’s a step in the right direction.

The other obvious one is the mortgage. We have a ridiculously low interest rate, and we should be taking advantage of that. Based on our budget, debt and overall bad luck with health problems this year, we could really only afford $750. That’s about $75 over the minimum — about $55 once 2013 property tax increases kick in.

With the raise, though, I think I’d like to start paying $950.

Yes, $200 more is a lot. But for now at least we will have the $5,000 EF and about $1,000 in a savings account — both at Capital One — which we will add to each month.

Of course, that kind of hike probably isn’t tenable every year. My boss’s crazy generosity has its limits.

But I played around with Excel a bit. Turns out, if we can increase our monthly payments by $100 each year, we’d own the house outright by late 2021/early 2022. (The math is a little fuzzy, since I had to ballpark tax and insurance increases.)

Those are some pretty exciting numbers — for me anyway. And it would only take a $1/hour raise each year to cover that. Granted, at some point I’ll have to hit a salary cap, but for now I think it’s a good goal to shoot for.

Since we’re using the raise to finish paying off the credit card and since we’ll have an emergency fund and even a small savings account, we should be able to keep up on the credit card. I’m going to budget for around $300 of random expenses each month. Obviously, some months that will be too much, others too little.

Even so, we should be able to put about $800 a month into the savings account. There will be an extra $250 a month once we’re done paying off the ER bills in a few months.

So that’s my tentative plan. Obviously, numbers will have to be adjusted based on how the fiscal cliff debacle is resolved and whether a baby joins the household in August. Still, I think it’s solid enough for now. Thoughts?



I hope everyone who actually celebrates it has a good Christmas. For the rest of you… Well, hopefully you at least enjoy some of the new movie releases in theaters. Nadine and I will probably go use our free passes for Les Miz here in the next few days.


  1. says

    We caught Les Mis yesterday. It did not disappoint! We thought it was excellent.

    It's great that you are bumping up your IRA contributions. The last I heard, you were keeping cash in your IRAs. Are you still doing that?

    • says

      Petunia: No we FINALLY got it started being invested and not just being a money market account. It just took awhile. I should still (in my copious spare time) look into switching over to Vanguard. But for now I'm just glad it's investing and will therefore actually earn gains. Probably.

  2. says

    Wow, that IS exciting. To be able to pay off the house so quickly will make a huge difference in your lives. At that point the money poured into the hideous house payments can go into the retirement fund, which will go a long way toward making up for the hard times.

    It's really important to get those retirement savings into an investment, though. Every day money sits in a money-market or bank account is a day that it actually loses value, because the interest on those accounts doesn't keep up with inflation. At Vanguard, you might want to look into a combination of something like short-term corporate bonds and a stock fund such as Windsor II or Wellington. They balance each other out, and over time earn a little. Taken together.

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