A Biweekly Paycheck Question of the Day

Is it better to get paid twice a month, or every other week?

Billfolder rhinoceranita requested that we discuss this question about paychecks and cash flow, from yesterday’s Ask A Manager:

I am in the final part of the process of taking a new job and negotiated a significant raise. However, the new company pays 26 pay periods and the old company pays 24, and coincidentally, the gross pay is exactly the same per paycheck. This is a raise over the fiscal year, but not a raise at all if seen from the point of view of a single paycheck. I wish I had known this when negotiating, because there’s a real psychological impact going on here. I’m not at all sure that I would be taking the new job if it had worked out to be a penny less, and I don’t know how to figure out if there will be an “extra” pay period remaining in the calendar year.

Do you have a formula for working out the date on which this transition will realize a positive gain?

Alison Green provides the same answer I would: 26 paychecks is more than 24 paychecks, so the letter writer is going to earn more money over the course of the year. Technically, the LW gets a “positive gain” from the very first paycheck.

But let’s look at how that plays out.

We’ll say, for the sake of round numbers, that this letter writer earns $3,000 gross per paycheck. At the LW’s previous job, this person would have gotten paid twice a month, bringing in $6,000 per month and $72,000 per year.

Now let’s look at what happens when the LW gets paid every two weeks. We’ll say—again for the sake of keeping things simple—that the LW began the new job on June 1, 2016 and gets paid every other Friday.

In June, the LW would receive $3,000 on June 10 and $3,00o on June 24, bringing in $6,000 for the month. So far, this doesn’t feel like a raise.

In July, the LW would receive $3,000 on July 8 and $3,000 on July 22. Still $6,000 for the month, exactly the same as the previous job.

In August, the LW would receive $3,000 on August 5 and $3,000 on August 19. $6,000 for the month.

September is a three-paycheck month: $3,000 on September 2, $3,000 on September 16, and $3,000 on September 30. That means the LW earns $9,000 that month.

The problem is that there are only two three-paycheck months per year, so although the LW is earning more at this job than at the previous job, the pay rate will feel identical ten out of twelve months.

It is possible to prorate those two extra paychecks over the course of the year. In this scenario, the LW would say “okay, I’m earning $78,000 over the next twelve months, so that means I can budget $6,500 per month, even though I’m only going to receive $6,000 per month for ten of those months.”

That’s kind of what I do with my freelance income, since I earn roughly the same amount of money every month but don’t receive the same amount of paychecks every month. I use my savings account (and occasionally my credit card) on low-money months, and pay them back on big-money months.

But that takes a lot of discipline, and it takes a healthy savings account, and it might take a zero-interest credit card.

So in this case the LW could follow the other commonly-offered advice and treat those two “extra” paychecks like windfalls. Those paychecks could go towards vacation spending, or IRA-funding, or debt repaying. This means that the LW can’t really upgrade their lifestyle at all, if that’s what they were hoping to do with this raise—because if you treat the two extra paychecks like windfalls, it means you have to live on two paychecks a month, twelve months a year.

The Extra Paycheck Club

So, Billfolders who get paid biweekly: how do you deal with those two three-paycheck months? Do you prorate your income over the year, treat the extra paychecks like windfalls, or do something else entirely?

I should also ask about cashflow: does getting paid on different days every month—June 10 and June 24, July 8 and July 22, etc.—make it harder to pay bills or make budgets? (The Ask A Manager commenters had a lot of divided opinions on that topic.)

And the big question for everybody: would you rather get paid every other week, or twice a month?

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