The Extra Paycheck Club

by Deb Weiss

Summertime! And the living is easy — especially if you are in the Extra Paycheck Club, and you might be whether you want to be or not. While two paychecks each month is still standard for many people, some employers pay bi-weekly. Instead of getting paid twice a month (24 paychecks/year), you get paid every other week (26 paychecks/year). It’s not exactly free money; you end up getting paid the same rate annually, just split over more paychecks.

Example: if you’re making $52,000/year before taxes, on a twice-monthly paycheck, your gross paycheck is for $52K/24 = $2167 per pay period. Bi-weekly paychecks for the same year would be $52K/26 = $2000 per pay period.

There are two main implications:

You make less each month. Same amount of money over more paychecks = less money per paycheck. Not exactly rocket science, but there’s an opportunity here to trick your brain. If you budget as if you were still getting two paychecks each month, you live on less each month. In the example scenario, you tell yourself that you’re making $4000/month, which is true for 10 months a year. If you set a monthly budget based on that amount, you live on less than you’re actually earning each month. It’s a neat psychological trick — pretending the money doesn’t exist may help curb spending.

You get two “extra” paychecks a year. If you’re on a bi-weekly pay schedule but living off two paychecks a month, then your two additional paychecks are like extra Christmases! For me, this usually happens in December/January and in July/August. What to do with this extra $2000 in summer? SO MANY OPTIONS:

1. SAVE or PAY DOWN DEBT

Probably Bert’s favorite option. The extra paycheck can go directly into a savings vehicle or a loan provider without you so much as seeing the impact on your regular monthly budget. A perk of the bi-weekly structure is the ease of saving these paychecks without a lot of advance planning. Basically: it makes saving easier.

2. SPEND

Look at this manna from heaven! It’s a windfall; your bank account just got an extra infusion. A friend who was previously on a bi-weekly pay schedule told me she used to use her extra paychecks to pay for vacations. So, in a sense: it makes spending easier!

3. ALLOCATE

The paychecks are part of your annual salary, and you may find it difficult to live on a smaller monthly budget. This may be particularly true if you or your employer is transitioning from a twice-monthly schedule to a bi-weekly one. You can do the math to figure out how much you’re earning on a per-month basis, and assign that income. In our example case, there’s an extra $167/paycheck you’re not seeing until you get that extra paycheck ($2000/12 paychecks). You could budget for $2167/paycheck ($4,334/month gross) and let the extra paycheck serve as regularly monthly income. This is a little tricky, but manageable with a spreadsheet or YNAB. (Not a sponsored link, but I did find YNAB invaluable during my transition into the EPC.)

4. COMBINATION

A little of column A, a little of column B. My guess is that this is what most people do with their extra paychecks, including myself: I’ll probably split between savings, student loans, and fun money for right now, with some set aside for additional expenses over the next couple months.

I’m not pushing any of these; they are the universe of options, as I see them. So, members of the Extra Paycheck Club — did I miss anything? Do you like being part of this club? What are you doing with your extra paycheck?

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