Living an E2 life on an E4 salary
How Looking Toward the Future Can Pay Off
April 25, 2014 by Mark Dye
It’s great to get a promotion. It shows you’re doing things well and are being rewarded for your hard work. (The extra money is nice, too!) But far too often people have a tendency to blow that extra cash by increasing their spending.
Think about it: Not including specialty pays, an E2 earns $20,602 a year, while an E4 receives $27,936. When broken down by month, that’s a difference of $611! Not exactly chump change. So what would happen if you kept living like you had an E2’s salary when you’re an E4? What can you do with that extra money? And how would looking more toward the future impact your finances?
Save for an emergency
If you open up a simple savings account and put some money aside for unexpected bills, it will add up quickly.
- Time to save up $500 for an emergency savings fund: One month
- Time to save up 3-month’s salary for that emergency fund: 11 months
Just think about how great it would be to take care of an auto repair or other expense immediately, right then and there, rather than worrying about how to pay for it!
Put into the Thrift Savings Plan
There are several types of TSP plans, each with different rates of return. Overall, however, they are a good way to save for retirement thanks to compounding interest, which is when interest earns interest and helps your investment grow over time. For example, if you invest your extra pay in the C Fund** each month, you might be surprised how much you could have for retirement.
- $133,679 in 10 years
- $491,283 in 20 years
- $1,446,779 in 30 years
Yes, you could retire a millionaire!
Save for a big purchase
We all find ourselves in need of something expensive from time to time, whether it’s kitchen appliances or new living room furniture. But how much difference is there between putting that on a store credit card compared to paying for it outright? And how long would it take to save up for such a purchase?
- Total cost with interest (15%) of putting $2000 in new furniture on a credit card: $2,816
- Total amount of time it will take to pay, making the 4% minimum payment: 91 months
If you save up for that purchase, rather than getting it immediately, you could save hundreds of dollars. It also wouldn’t take as long as you think.
- Total cost if you were to pay in cash: $2,000
- Total amount of time it would take to save that cash: 3.2 months
The key is to not increase your spending along with that new pay increase. Instead, use that extra money wisely now—your future self will be glad you did.
*Pay information taken from the Defense Finance
and Accounting Service website. E2 and E4 salaries based on four years of service.
** Based on a 10.30% rate of return since the fund’s inception. Figures from tsp.gov.
*** Total amounts deduced using the calculators at BankRate.com and do not include any matching contributions. For more information about the TSP, visit www.tsp.gov