How do extra paychecks fit into your financial puzzle?
Most budgeting programs are set up to operate by calendar month. And if someone sits down with a spreadsheet to create a budget, probably among the first things they do is enter the month names across the tops of twelve columns.
Budgeting by calendar month makes a lot of sense and fits with the way most of us tend to think about our earning and spending. But for everyone who gets regular paychecks weekly or bi-weekly (every other week), monthly budgeting creates a mismatch challenge: The actual income received in a calendar month varies because in some months the earner gets an “extra “ paycheck due to the way the pay schedule fits into the calendar.
If you’re paid weekly, you normally get fifty-two paychecks per year, which means you’ll get four paychecks in eight months and five paychecks in four months. Compared to the four-paycheck months, your income is 25% higher in the five-paycheck months.
Similarly, if you’re paid bi-weekly, two months per year you’ll get three paychecks instead of the usual two. That works out to 50% more income in those two blessed three-paycheck months. You’re going to feel rich (almost)!
Extra Paycheck = Yippee! Let’s Celebrate
If you’re a normal human working hard at your job and aiming to pay off debt and stay on a budget, you may look forward to those extra paycheck months as a time you can temporarily relax your financial discipline and maybe have a couple meals out or buy a gadget you’ve been putting off or whatever. I do think that you’re more likely to reach your financial goals if you exercise a little flexibility in your budget and give yourself a treat or small extravagance at times—absolutely nothing wrong with that! On the other hand, if your plan is to spend all those extra paychecks on things outside of your budget, I think that’s less than ideal.
Ideas for Extra Paychecks
Here are some ideas for putting at least the lion’s share of those extra paychecks to work for you. Adopting these approaches, or a creative one of your own, can’t help but boost your progress toward your goals.
Pay Off Debt! You knew this was coming, didn’t you? If you’ve got high-interest debt, like most credit card debt, the best thing you can likely do with an extra paycheck is send most or all of it to the lender. And send it right away, before that extra cash starts evaporating from your bank account! Think of it this way: Taking a $750 whack at an 18% APR credit card debt will save you about $120 in interest over the next year. That’s huge!
Holiday Fund Do you typically enter the new year with a post-holiday spending hangover and rebuilt credit card balance? Stash a couple extra paychecks over the course of the year in a special holiday fund—even create a separate bank account if you need to—and you’ll take a lot of the stress out of your holidays.
Vacation Fund Same idea as Holiday Fund but you’re setting aside the money for a specific trip for which you’ve estimated all the costs.
Periodic Expenses We’ve all got expenses that come up just once a year or maybe once a quarter. Examples include insurance premiums, tuition, subscriptions, memberships, refill the fuel oil tank, etc. If you’re not setting aside cash for these periodic expenses, then unless you have a lot of slack in your budget, you may have no choice but to borrow money when these sorts of bills are due. Instead of borrowing (or using your emergency fund—not a good choice for expenses you can forecast and for which you could and should be planning), you can cover these periodic expenses by slapping enough extra paycheck money into a separate bank account to cover them. Then when they’re due, use money from your periodic expenses fund to pay with cash instead of debt.
Tax-Advantaged Accounts If you have trouble coming up with the money to fund an IRA, 529, or HSA, extra paychecks are the perfect solution. Save this money and reap the benefits these sorts of accounts are designed to deliver.
For those of you paid by commission or otherwise with income that’s very “lumpy,” Jason at WorkSaveLive wrote a nice article on how he manages: “How We Create an Irregular Income Budget“.
What Do You Do?
If you’re in the “extra paycheck” world, how do you handle the additional income? Do you have a plan for it, or does the money sort of get absorbed into your finances with nary a ripple?