No matter what kind of work we do, we all look forward to the next paycheck. For many of us, the anticipation unfortunately stems from the fact that we get paid bi-weekly, or twice a month, even though our bills come monthly.
Over 36 percent of U.S. private businesses pay their employees every two weeks, which means an extra paycheck two months out of the year. As nice as it is to receive those “extra” paychecks, if we’re not on top of our financial game, we can get ourselves into precarious situations.
Learn how to savor a biweekly pay cycle via the following tips:
Budget on a Two-Week Schedule
Everything we’re taught suggests that we need to budget on a monthly basis. But this doesn’t make sense if our income comes twice per month. We can’t change the fact that our bills come monthly, but we can decide how to allocate our biweekly income so we’re not short at the end of the month.
If you don’t trust yourself to divvy up your resources appropriately, use a budget planner app like Clarity Money to integrate your bill cycles along with income. This will provide oversight on your overall financial health, allowing you to pay off bills immediately without jeopardizing your cash flow.
Automate Emergency Fund Contributions
Putting your hard-earned money into an account that you’ll never touch unless something unfortunate occurs is hardly enticing. However, you’ll be glad you did so when that surprise expense inevitably arises. Generally, it’s a good idea to have at least three months of living expenses saved in an emergency fund. If you can sock away six months, all the better. But you don’t need to get there right away. Set a reasonable amount to come out of each paycheck and feel your financial security grow.
Add to Your Checking Account with Each Paycheck
An emergency fund acts as a safeguard for all sorts of unexpected costs. It’s not meant to be used when you mismanage your funds. That’s why you also need to have a cushion in your checking account equal to one paycheck. There will inevitably be times when all your bills align and exceed one paycheck. Having that cushion will keep you from lapsing on any accounts.
Change Your Tax Withholding
The Tax Reform law signed in late 2018 changed taxpayers’ withholding rates, but it’s still worth checking to see if too much tax is being withheld in your paychecks. You might want that large tax refund at year’s end. Who wouldn’t? Except, it’s a matter of simple psychology. When you receive a tax refund, you’re only getting money that you could have used all year long to your benefit.
Reducing your withholding will free up a little room in your budget so you can grow your emergency fund or contribute more towards retirement. Just make sure to set a little money aside so you can cover the minor tax bill come filing time.
Plan for the Two Extra Paychecks
Many people would prefer to receive money more frequently instead of once a month. At the same time, a significant chunk of those people would also use the months where they receive a third paycheck as free money. This is no different than spending a certain percentage of a monthly income on things that don’t benefit a financial situation.
To get the full value out of a biweekly paycheck cycle, know when that third paycheck is coming and have plans for it. If you’re trying to pay off a student loan or credit card balance, use that paycheck to accelerate your path out of debt. Or you could use that paycheck to fund an individual retirement account (IRA). If you have a mortgage, then you could use the money to get ahead and save a little on interest.
At the end of the day, income is income. If you’re motivated to get ahead financially, then it doesn’t matter if you get paid biweekly or monthly. The important part is to prioritize spending on things that serve your long-term wellbeing.