How to Make Your Federal Pay Raise Work for You: Strategies to Maximize Extra Income

If you’re a federal employee, the recent announcement of an average 2% pay raise for 2025 may not seem like winning the lottery. But it’s worth investing those funds in a way that will do you the most good. That’s especially true now when many eyes will be on government workers. Here are some moves to consider.

3 Good Uses for a Raise

Financial advisors typically suggest using a pay raise, bonus, or other added income in these ways:

All three of those are fine goals. But with the new presidential administration talking about deep cuts to the federal budget, it’s worth emphasizing that last one for federal employees. Your job may not be in jeopardy, but ensuring an adequate emergency fund could pay big dividends in peace of mind.

How Large an Emergency Fund Do You Need?

Traditional financial wisdom calls for building an emergency fund equal to three to six months of your living expenses. But a lot depends on how secure your job is and how quickly you could find another one if you lose it. For federal workers, that could hinge to a large extent on how transferable their current skills are to the private sector.

Louis Barajas, a certified financial planner in Santa Ana, Calif., says he sometimes recommends that clients aim for a fund that could cover 18 months or more, especially if they are in industries where lengthy job searches are the norm.

He says everyone should have an emergency fund that is at least large enough to cover their car, home, and health insurance deductibles.

Where to Put Your Emergency Fund

Again, traditional wisdom recommends keeping your emergency fund in “liquid” accounts where you can quickly withdraw money. But there is liquid, and then there is liquid.

A bank checking account that pays zero interest is as liquid as it gets but not a great place for keeping much money. Barajas recommends high-yield savings accounts from online banks or money market funds from major mutual fund companies. The former should be federally insured (but do ask), while the latter are not but have historically been very safe. Both are paying something close to 5% in interest at the moment.

Barajas also offers one additional tip: If you own a home, consider applying for a home equity line of credit (HELOC) at a bank or credit union. It shouldn’t cost you anything unless you actually use it, and it will provide a source of cash should you ever need it. “The time to get a HELOC is while you’re working,” Barajas notes, “not after you’ve been laid off.”

The Bottom Line

Everyone should try to build a good-sized emergency fund in case of a job loss or other calamity. Using at least a portion of your pay raises will help. To quote traditional wisdom one last time: Better safe than sorry.