The Dilemma of the Raise

I’m getting a raise: I got the official paperwork today and the extra money will be on the paycheck I get on April 27. Also on that check will be the 1% increase toward my retirement savings. I do this purposely so that I never miss that extra 1%. It comes at the same time as my average 3% raise (this year it’s 3.75%), so I see extra money on my check and extra money goes to my 403(b). I consider that a win/win.

I should have about $120/month extra in take home pay. So the question becomes, of course, what to do with that “extra” money.

Put it in Savings: My first inclination is to stick it straight into savings. That helps cover adoption costs and the raise in tuition for C that we know we will see next year. At the same time, April was our final payment on the basement work we had done (to prevent flooding), and we’re already going to be putting an extra $400 in savings every month starting in May. That is earmarked for home improvement work, like replacing all of our windows this summer. However, we already have some money earmarked for this, and I’m just not certain that it will need the full extra $3,200 we will be saving. That means some of that money could go toward tuition and adoption expenses.

Or Pay Down Debt: My other thought was to apply $50 or $100 more per month toward our existing debt- which is only my student loans and the mortgage. The mortgage is our highest interest debt (at 6%), but with 23 years still to go on the loan term, I just don’t see putting the extra money there as a timely enough benefit for it to matter right now.

Instead, I looked at putting the money toward my student loans. If we paid $50/month extra on my student loans starting in May, it would knock 6 months off the repayment period. At first, 6 months did not seem like it was really worth it to me, but then I looked at the dates. Paying off the loans 6 months earlier means they are paid off in mid 2016 instead of early 2017. If we get a child born this year, 2017 will be the year he/she starts kindergarten, and having an extra 6 months to save for private school tuition seems like a good thing.

And then there is the math. Adding $50/month to the pay off of my student loans, it will take us 53 months (as opposed to 59) to pay everything off. That is $2,650 that would otherwise go straight to savings. Currently, we pay $710/month toward student loans. Cutting that short by six months would save us $4,260 (not counting the $50 extra/month). That’s a real savings of $1,610. Even over 4+ years, I can’t get that kind of interest return on $2,650 put in to savings.

So if $50/month was good, I wondered what $100/month extra toward my loans would look like. Well, that would cut another 4 months off the repayment time. So that means for a cost of $4,900, we would save $7,100, for a real savings of $2,200.

Shared Decision Making: Both of those seem like excellent investments. And yet, I’m still not certain I wouldn’t rather hedge our bets with adoption costs, tuition, and home improvement.

And that’s the reason I’ll be sitting down with C tonight and looking at the numbers, and we’ll make the decision together.