This month is a unique month for us as we await the coming of our second child. Due to the change that we are about to experience we are wanting to do a more financially focused goal rather than one focused on schedule or habits since our schedule will be all over the place once the baby comes. With that, our goal for September is to save the extra paycheck we are getting this month.
For anyone that gets paid bi-weekly (every other week) then you know that twice a year you get an extra paycheck in a month. Since 10 months out of the year you live off of 2 paychecks one tends to base their budget on 2 paychecks a month. When a month comes around where you get 3 paychecks it always feels as though it is extra and in your head, you make up all of these plans for what you are going to do with that money such as pay off debt or save. Unfortunately, what usually happens though is that it disappears without you doing what you wanted to do with it.
SO HOW DO YOU FIX THAT?
You get it out of your checking account. If you leave it in there you will never see that money again. It will get spent and you won’t know exactly on what.
The first thought would simply be to take one of your whole paychecks and put that in savings. The problem with that is you end up with a gap in your pay periods and it throws off your habits. For example, if you get paid on the 1, 15 & 29 of the month and you saved the full amount of any one of those paychecks you would have 4 weeks between receiving income. That would completely throw you off your rhythm. You are used to getting a paycheck every 2 weeks so don’t fight it.
What we do suggest is to save 1/3 of each paycheck which is what we will be doing.
HOW DO WE ENSURE THIS HAPPENS?
For this I am going to take a cue from our article on Automating Your Debt Payoff. We won’t necessarily automate this process though since these are really instances of the exception rather than the rule. As each paycheck is deposited, the next day we will transfer 1/3 of each paycheck into our high interest savings account. After doing this 3 times we will have saved the equivalent of 1 paychecks without interrupting the 2 week pay schedule.
To help make sure we don’t miss one of these transfers we can set a reminder on our calendar.
The reason why we wait one day to transfer it is that the day it is deposited it always shows up as pending. To avoid any cash flow issues we simply wait until we feel confident it has cleared.
WHY IS THIS IMPORTANT?
As you might know a few months ago we went from 2 salaries down to 1 salary when Erin quit her job to be a stay at home Mom. With a tighter budget it is tougher to save so when we get an opportunity to save a larger chunk of money like this we need to take advantage of it. Gone are the days when we could save that second paycheck.
WHAT CAN YOU DO WITH THESE EXTRA PAYCHECKS?
I already mentioned you could pay off debt with them but you could also save or invest that money if you are debt free. If you took 2 paychecks and put them towards a Roth IRA that would help you save a substantial amount towards contributing the max of $5,500 per year. That could result in huge growth over time by focusing on the potential of these extra paychecks.
You could also build / reinforce some sinking funds for items such as car repairs, home improvements, insurance or vacation.
So what do you do with your extra paycheck? How do you ensure you save it?
My husband is paid every other week like you. Since we set up the budget per month, not per 14 days, it doesn’t matter if we save that whole and rare 3rd paycheck. 90 percent always goes toward icky, distasteful, ugly DEBT! The other 10 percent we decide together on special charity donations, maybe a pizza, stuff like that. Congrats on the upcoming birth of your second child!
Nice job on getting that extra paycheck towards debt! It is also good that you have been able to find something that works for you. To clarify, we don’t budget per 14 days, we budget per month. The 14 days part is really more of a cash flow issue that I am addressing. Typically, you have bills that you pay in the first half of the month and bills you pay in the second half. If you get paid on the 1st of the month, save the paycheck from the 15th and then it isn’t until the 29th when you get the second half of that monthly income you dont have much time to pay bills due that month. Also, it messes up the next month since your first paycheck for the next month doesn’t come until the 13th roughly. If you have bills due before then it is an issue. I guess it also depends on how much extra money you keep in your checking account which allows for some give and take.
Ohhhh, I see what you’re saying. Thanks for clarifying. Yes, we have extra cushion in our checking account. That cushion is left over from the dark ages when Hubs and my paychecks were mailed to us. Most of the time the mail was reliable, but not always. Sometimes the bank would be closed and couldn’t get the check deposited. Sometimes we were too busy to get to the bank. I think having a cushion makes things easier, but we treat it like it’s not there. There may be, say, 1000 extra in the account, but we pretend like zero balance is at the 1000 so we won’t recklessly overspend.
That’s funny! We do the same thing and keep $1,000 in our checking account as well. Just like you we consider that the to be “zero” so we don’t spend it but it allows us to dip into it a couple days before we get paid. It has worked really well for us the last few years. I think everyone needs to have something in their checking account but if you aren’t intentional about what that amount is then things get fuzzy.
Susanne @ The 76K Project
Okay, this is a FANTASTIC idea – to save 1/3 of each paycheck this month – and I am totally using it. Not sure why I didn’t think of it before!
This is the first year I thought of it as well for some reason but we started to be financially aware since 2012. In the past it was less of an issue for us when we had 2 incomes and were saving around 50% each month but that is not the case anymore since we just have 1 now. Hope it works well for you! Seems to be working well for us so far.