“What?” you ask. “I need every penny of every paycheck, and I certainly don’t have any extra ones!”
Hear me out. If you are paid weekly, you receive 52 checks a year, which means that you get four paychecks a month eight times and an extra paycheck (five total) for four months each year. In the same way, those paid bi-weekly get paid twice a month ten times and receive three paychecks two months each year. If your pay comes twice a month or monthly, this column is not for you. The rest of you keep reading!
The problem with these extra checks is that most people don’t have a plan for them. What happens to your money when you don’t have a plan? Right! It disappears with nothing to show for it. Here is how to put that money to work for you.
1. Define your financial goals.
Some good ones are debt reduction, emergency savings, college savings, or investments. Hold that thought — we will come back to it in a moment.
2. Prepare your budget.
Base your income on the checks you know you will receive each month: four a month if paid weekly or two a month if you are paid every other week. In addition to including all regular monthly expenses, be sure to include those expenses which don’t come due each month, such as homeowner’s insurance, auto insurance, propane fuel, property taxes, vacation or Christmas. You will need to convert those non-monthly expenses into monthly amounts by dividing the annual amount by 12.
You should deposit the total of your non-monthly budget expenses into a savings account every month — how else will you be sure to always have that insurance payment or property tax payment when you need it?
Important: Balance your budget! Your budgeted expenses cannot exceed your monthly take home pay, so keep working on your budget until it balances.
3. Obligate your extra checks for non-monthly expenses.
Doing so makes perfect sense. Some payments aren’t due every month and your extra checks don’t come every month, so why not try to match them up? This is where you are going to put those extra checks to work, so stick with me. You have already budgeted to pay for those non-monthly expenses with money from your normal monthly take home pay, but, by using your “extra checks” instead of your normal pay checks, you will be able to use some of your monthly income for other purposes. How much? The math works out to one twelfth of a month’s pay. For example, if your monthly take home pay is $3,000, you have just liberated $250 a month. Making sense? Good. Now: remember those financial goals? Use that new cash flow to help you reach them.
Why not simply add that $250 to your budget in the first place?
That is a great question, and doing so may work for those who are extremely disciplined. However, I prefer my way for two reasons:
- It isn’t true. Your budget needs to reflect reality, and showing an additional $250 income every month when you only receive it every few months will create a false sense of security.
- You will need to carry a buffer balance in your checking account. Why? Because you are transferring money every month into your non-monthly savings account which isn’t there every month; it is only there when you receive those extra checks.
I believe the best budget is one that reflects each and every month what you are doing with your finances each and every month. Spreading a number superficially throughout the year is a sloppy way of asking for trouble. Wait for those extra checks and have a plan for them when they come. You will be putting money which formerly vaporized to good use.
Do you receive extra checks? How do you manage them? Leave a comment below!
{ 9 comments… read them below or add one }
We get paid by the week so I divide our monthly expenses by 4 and allocate money each week to our budget categories. Obviously things that only get paid once or twice a year get divided by 26 or 52.
I’ve learned that you really don’t get an entire extra paycheck. Groceries, gasoline, and utilities still get consumed those extra weeks.
I do find extra in our mortgage and phone bill (thankfully we don’t have other debt). In my perfect world, that extra money would go to pay down the principal of the mortgage. But we have a big payment anyway as we have a 12 year note (the mortgage IS getting paid down aggressively!) We use those extra paychecks for anything that has come up (usually car repairs) that our normal budget couldn’t handle. For us, it’s become an emergency fund for our emergency fund (that phrase was stolen from Dave Ramsey’s wife!)
Mary–I believe that with some fine tuning, you could actually reap the full benefit of those extra checks. The key is to make your entire budget balance by basing it on four checks a month. This includes those things that get paid once or twice a year. If you can manage to do that, and live on that budget, the extra checks will truly be like bonuses. This being said, I think you are doing great by using your extra checks for emergencies. Much better than letting the money somehow vaporize.
Great tips. I could also see using the extra checks to go towards vacations or big ticket items.
Joseph — absolutely! If your normal monthly take home pay is $3,000, you could fully fund a nice vacation with those extra checks.
“Extra paycheck” seems like such a foreign concept. but i like the way you have explained it. I never thought about the extra check every so many months. now, I wonder where all of mine went.
Yes, it does seem like a foreign concept. Hoping you can figure out where yours are going!
Great article. As a graduate student receiving a monthly stipend, unfortunately I don’t reap the benefits of an “extra check,” but my wife is paid biweekly. This seems like a great way to put money into savings. Looks like we have an “extra check” coming in August!
Jordan — I am glad to read that you “get it”. Do you have a plan for your August extra check yet?
Joe – I’m not sure exactly what it will be put towards, but it will definitely be transferred from our normal spending/bill account to our savings and distributed in one or a few of our ING “savings categories”