There is more to military compensation than just basic pay and your housing allowance. There are special allotments for deploying and recruiting, and bonuses when you re-up. Applied properly, that money can be used to build wealth from the moment you join the service. When you transition to civilian life, those additional income opportunities go away. Saving and investing that extra income now can help you build wealth beyond your service years, and may help you more quickly reach your financial goals.
Regular vs. Special Pay
Regular compensation includes your basic pay and any allowances you’re receiving. Basic pay is determined by your rank and time in uniform. Allowances are meant to cover specific expenses related to your military service. You must be eligible to receive them and they must be used for those specific expenses. They include:
- Basic Allowances for Housing (BAH) to cover housing costs.
- Basic Allowances for Subsistence (BAS) is for food to ensure your military readiness.
- Dislocation Allowance (DLA) reimburses relocation expenses.
Yet there are other income benefits beyond basic pay and allowances. These income opportunities are known as special pays.
Examples of special pay opportunities include incentives for performing a job, or bonuses when you re-up. Other special pay includes:
Assignment Incentive Pay (AIP)
AIP is additional income you receive for performing a duty like flying or working on submarines. Another example of AIP would be recruiting duty. AIP can earn you up to $3,000 a month.
Hardship Duty Pay (HDP)
HDP compensates you if the conditions of an assignment or its location create a physical hardship or are excessively difficult or unhealthy. The max HDP you can receive is $150 per month.
Hazardous Duty Incentive Pay (HDIP)
HDIP is compensation for performing high-risk duty, like working with chemicals or working on a flight deck. Monthly hazardous duty incentives are typically $150. Free fall parachute duty fetches more.
Hostile Fire Pay/Imminent Danger Pay (HFP/IDP)
HFP/IDP is self-explanatory. If you’re stationed in an area where you’re on the receiving end of hostile fire or in imminent danger, you qualify for the $225 monthly HFP/IDP incentive.
In addition to special pays, some servicemembers are eligible for career retention bonuses. These are additional annual bonuses to help find and retain highly qualified individuals and personnel serving in critical career fields. Retention bonuses typically are awarded to keep doctors, nurses, and pilots in uniform.
Special pays are windfalls. Treat them as such. They’re not guaranteed, so don’t depend on them to pay your bills. For example, if you’re on jump status, you’re compensated for jumping out of a plane. If you’re injured and removed from jump status, that income disappears. So, don’t treat it like it’s basic pay.
A better long-term strategy might be to put that money to work toward your financial independence.
How to Build Wealth With Your Additional Pay
There are many opportunities to earn extra money while you are serving in the military. What you do with that extra money may determine your future financial success. You can consume it today for fleeting satisfaction. Or you can use the money to build wealth and satisfy future high priority long-term comfort goals.
Some of the ways you can take full advantage of your special pays include:
- Paying Down Debt
- Saving For A Rainy Day
- Investing In Your Future
- Financing Your Children’s Education
Paying Down Debt
Paying off debt is an intelligent use of your additional income. The faster you get rid of it, the sooner you can invest for your future. Paying high interest on consumer debt takes money that might otherwise be used to move you closer to financial independence
Using special pays to reduce debt can improve your cash flow. The funds that would have paid interest to the credit card company can end up earning interest in another account.
In addition to paying down debt, you might also seek relief the Servicemember’s Civil Relief Act (SCRA) offers. It provides a six percent interest rate cap on any debt you incurred before your military service.
For example, if you had a credit card at 16 percent interest before joining the service, under the SCRA, your credit card company must reduce the interest rate to six percent. You must provide the creditor with written notice and a copy of your orders or other proof of military service, like a letter from your commanding officer. The rate cap benefit can save you a lot of money in interest and may help you get out of debt quicker.
Saving For A Rainy Day
If you don’t already have three to six months of living expenses saved, the additional cash from your special pays can be used to build up emergency savings. Emergency funds can help you avoid or repair financial problems. Special pay income can also be used to save for future financial goals.
Servicemembers can take advantage of programs like allotments to automatically make transfers to a savings account. Another program you can use to build up savings is the Savings Deposit Program (SDP) when you are deployed. The SDP pays you an annual rate of up to ten percent on money you put into the program while on a qualified deployment.
Investing In Your Future
Using special pays may also help you max out your annual Thrift Savings Plan (TSP) contribution. As long as you’re contributing a portion of your basic salary, you can contribute part or all of your bonuses, incentives, and special pays.
Financing Your Children’s Education
Extra income can also be used to save for your children’s education. Your incentive pay can fund 529 plans or Education Savings Accounts.
Wealth Accumulation is a Slow Process
Building wealth doesn’t happen overnight. It is a gradual process that typically unfolds over the course of your entire military career. The opportunity special pays provide can help you save additional income. This opportunity won’t be available to you after you separate. You can only use it during the time you serve.
As such, special pays can be a key ingredient in your recipe for financial success. Using the extra income – and benefits like the SDP or the TSP – may help prepare you for the transition out of military service. You simply have to start.
It is also important to plan in advance. Use our Retirement Nestegg Calculator to help you plan for a secure retirement. Or talk with a Member Service Representative at 800.235.8396.