“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.
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!