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?