Budgeting Within Your Base Salary – Step 1: What IS Your Base Salary?

I suggest budgeting within your base salary, as it’s fixed no matter where you are. From that base salary, after taxes, you’ll meet your basic needs, and pay yourself first – your TSP and your IRA. If you are chasing FI, the remainder, everything in your paycheck that is above that basic number, will go into low-fee index funds or other earnings vehicles.

Throughout this post I’m going to be working on the assumptions that you are J. Doe, a single, mid-level FS-03-01 for simplicity, but you can pop your numbers into the calculations instead.

What’s My Base Salary?

The first step, is figuring out what your base salary really is. The Department of State has a handy list of tables that are updated annually.

J. Doe, without taxes, without incentive pay, without COLA, makes $69,022 annually, or $2,654 per pay period.

As an FSO posted overseas (lucky duck), J. Doe makes what is called Overseas Comparability Pay, for an extra 18.81%, meaning that they make $69,022*1.1881 = $82,005 (this is before incentive pay percentages)

If J. Doe were posted in Washington, DC (they say we can’t avoid it…), they would get a single percentage bump to account for the expenses, etc. that one incurs in D.C. of 28.22%. So, they’d be making $69,022*1.2822 = $88,500 (there are no additional incentive pay percentages in this case)

What About Withholding?

Starting out at $82,005, we assume that J. Doe will be getting 1/26 of that each pay period, or $3,154, but that’s not actually the case. Several things get taken out of J. Doe’s paycheck before J. sees it in their account.

Thrift Savings Plan (TSP)

The TSP is the government’s equivalent of a 401(k), with different pools to contribute to. Contributions to the TSP are removed pre-tax, and thus decrease the salary that the government sees to tax. This is called decreasing your tax liability. Because J. Doe wants to decrease their tax liability, they contribute the maximum per year, which is $19,000 per year, or $730.76 per pay check.

Taxes

As mentioned above, J. is contributing $730.76 per paycheck to the TSP. This decreases J.’s tax liability by $19,000 annually, bringing their taxable salary to $82,005-$19,000 = $63,005

With that in mind, J. now needs to figure out their tax bracket.

For singles, the tax brackets for 2018 are as follows:

Lower LimitUpper LimitRateJ.’s CalculationWhat J. Pays in this Bracket
$0$9,52510%0.10 * $9525$950.20
$9526$38,70012%0.12 * (38,700-$9,526)$3500.88
$38,701$82,50022%.22*(63,005-$38,701)$5346.88
$82,501$157,50024%NA0
$157,501$200,00032%NA0
$200,001$500,00035%NA0
$500,00137%NA0
Total$9,797.96

So, Federal Tax alone, for a single FSO-03-01 stationed overseas, looking only at their base pay, will be $9,798 a year, or $377 per paycheck withholding. This will change in the case that J. Doe is married, filing jointly or separately. At the end of the year, J. will also likely get some tax credits back via the standard or itemized deductions, and any other extenuating circumstances. For now, however, that’s what the standard withholding would take.

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

For those interested in other options for taxes, AFSA provides a fairly handy Tax Guide.

Social Security

Per the IRS, the current Social Security withholding rate is 6.2% for the employee, which is matched equally by the employer. So, looking only at the base salary of $63,005, 6.2% annually is $3,906, or $150 per paycheck

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

Medicare

Per the IRS, the current Medicare withholding rate is 1.45% for the employee, which is matched equally by the employer. So, looking only at the base salary of $63,005, 1.45% annually is $913, or $35 per paycheck

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

Foreign Service Pension System

As I describe in another article, the U.S. Government is one of the few places that still has a pension system. It pulls out 1.35% of your basic salary, so that becomes $851 annually, or $33 per paycheck

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

Pay Yourself First

While this is not an automated withholding, you should also be paying into your IRA, up to the annual limit, which is $6,000 in 2019, according to the IRS. Whether or not you decide to go for a traditional IRA vs. a Roth, and/or whether you can get tax rebates for that is beyond the scope of this article, but Motley Fool does a good walkthrough using 2018 numbers.

Even if you decide to front-load your IRA, just to “get it out of the way,” we will distribute that over 26 pay periods, for $230 per paycheck.

What Does That Leave for J. Doe?

With a base salary of $82,005, J. Doe’s biweekly paycheck starts out at $3,154, from which they pay TSP, Federal Tax, Medicare and Social Security

Starting Base Salary Paycheck$ 3,154
– TSP-$730
– Federal Taxes – $377
– Social Security– $150
– Medicare-$35
– FSPS– $33
– IRA-$230
REMAINING: $ 1,599

So, that is $1,599, per paycheck, that J. Doe has to spend on whatever they need or want for two weeks. Their taxes, and their future, are already calculated for.

That’s HARD.

This may be difficult to do when you first start out, but I promise you that it can be done. I’ll be doing a walkthrough of my own later, as well as for those who have families.

If you’re having trouble, here are a few wiggle space calculations to help you get started.

  1. If you can’t fit your budget on your base salary, can you fit it on base salary + COLA? COLA is something specifically added to help buffer your expenses when you’re posted to an expensive post.
  2. Can you fit your budget on your base salary if you pay your TSP and/or IRA out of your incentive pay + COLA? That would mean that J. Doe started with $2,573 per paycheck.

As with everyone on the path to FI, the idea of the FS Path to FI is to optimize your spending and your budget. If you start out using these, it is in your best interest to try to identify those areas of spending that aren’t optimal, and reduce them, if possible, to be within your base salary. Every extra dollar that you can squirrel away into a passive income fund will bring you one step closer to FI.

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