The bonus of bi-weekly pay
This article is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes.
At my previous job, I was paid on a monthly basis. I loved it. I got all my money for the month upfront, so it didn’t matter when I scheduled automatic savings or investment transfers.
When I moved to a job that was on a bi-weekly payroll schedule, I had to make sure the transfers were split across the month so I didn’t inadvertently empty my checking account! I was grumpy about it at first, but I’ve come to discover a wonderful secret about getting paid bi-weekly: If you’re on a biweekly payroll schedule, you’re getting a couple of “bonus” pay checks every year! Yes, that’s right. Bonus checks. Let me explain.
The Bonus of Bi-Weekly Pay
If you’re like me, your budget is constructed around a month’s worth of expenses. Most bills are monthly, rent or mortgage payments are monthly, and I’m betting you plan your grocery spending by how much to spend in a month. Maybe someone budgets by quarter or even by year, but not many people do.
So in any given month, you can expect to bring home two paychecks. Let’s say you take home $1000 with each check. Your budget allocates how to spend $2000 every month.
But wait a minute. Are you paid bi-weekly? If you look at a calendar, you’ll find that in some months, you actually receive three paychecks. Don’t believe me? Have a look at March. Say you get paid every two weeks on Friday. If your first check came on the 2nd, your next came on the 16th, and the third was on the 30th. All your expenses have been entirely covered by the first two checks; this is the amount of money you planned on receiving. The third is pure gravy!
Assuming you’re not living paycheck to paycheck and have enough of a buffer in your primary savings account, this is a huge opportunity to hit your some of your financial goals hard.
Putting the Bonus to Work
What might you do with this “bonus” money? The possibilities are endless, of course. Here are just a few suggestions:
- Fund a holiday account. I don’t have any consumer debt and I invest regularly anyway, so this is my personal favorite. With my first “bonus” check, I grab $500 and stick it in a ING savings account called “Christmas Fund.” When the most wonderful time of the year comes around, I can enjoy it and not worry about all the money I’m spending; it was allocated for that purpose long ago.
- Pay off high interest debt. If you’re carrying credit card debt, you can use your bonus check to make a serious dent in it (or perhaps pay it off entirely!). This is a brilliant way to spend your bonus money; you get an automatic return of whatever interest rate you’re paying.
- Make an extra mortgage payment. I’m a renter in Brooklyn, so I know very little about mortgages! However, I have read that making one extra mortgage payment a year is supposed have a great impact on the overall amount you spend to pay off your mortgage. Maybe you’ve thought about doing this before, but wondered how to find the extra money to do it. Using your “bonus” check makes it completely painless.
- Max out your IRA. If you’ve got extra room in your Roth IRA or traditional IRA, why not max it out with your “bonus” money? Remember, you’ve got until 4/17/2012 to contribute to your 2011 IRA. The limits are $5,000 if you’re younger than 50 and $6,000 if you’re older than 50. If you don’t have an IRA yet, then start one with your “bonus” money!
- Start (or contribute to) an emergency fund. If you don’t yet have an emergency fund, start one with this “bonus” check. You’ll immediately have half a month’s expenses covered. In fact, you could build your emergency fund entirely through “bonus” checks. If you get two “bonus” checks a year, in three years time you’ll have a three month emergency fund. Not bad for pretty much no effort!
- Treat yourself! After regularly reading about personal finance for three years, I’ve become pretty good with money. In fact, I might be frugal to a fault. If you’re like me, you might want to use your “bonus” check as an opportunity to enjoy life. Take a spur of the moment trip, go out to that expensive restaurant you’ve been drooling over for years, or buy thoughtful gifts for your loved ones. I’m thinking about using some “bonus” money to go on a hot air balloon ride for my birthday!
Naturally, you’ll want to spend your “bonus” money in the best way possible for you and that depends on your own unique circumstances. So, what are you doing with your “bonus” money?
This article was written by Corinne.
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There are 98 comments to "The bonus of bi-weekly pay".
I will buy gold coins with the bonus money. Gold is a hedge against recession and moreover it is not difficult to liquidate gold when you need money urgently.
Nothing like buying when gold is at all-time highs and there’s lots of stories about new gold mines getting started. (And unemployment is easing up and the stock market is at a nice clip.) I suppose if Obama gets elected to another term there will still be excess demand for it, but you also might as well invest in bullets if that’s your reasoning.
p.s. It’s much easier to liquidate stocks/bonds/CDs/etc. if you’re concerned about getting full value for your money. You have to shop around if you don’t want to get ripped off with gold coins. (Hint: That place Glenn Beck advertises for… not gonna give you full value.)
Ad hominem, straw man, juvenile.
…and you really don’t understand gold or economics!
How on earth was this an ad hominem or a straw man?
Gold is at an all-time high against the dollar, but the dollar is near its all-time low. The government prints money and artificially lowers interest rates. That devalues the dollar, while gold holds its value (its value lies in its nature as the quintessential medium of exchange for the fruits of production).
I got paid 3 times in March, so I bought a bunch of silver, as I already own physical gold and GLD. I also bought some concert tickets, which are more fun than metal.
Ad hominem:
“Gold is foolish, as are you being a gun-toting Obama opponent who follows Rush Limbaugh, who is implicitly evil”. All irrelevant.
Straw man:
“Buying at an all time high is stupid and ‘there are new mines opening up'”
Besides the price claim being inaccurate, this argument ignores the basic investment thesis of gold (weakening currency). It does so by citing anecdotal evidence of ‘new mines’, perhaps true, but 2000+ years of history shows gold supply grows at 1-2% per annum.
Not even a convincing straw man.
Think.
“Gold is foolish, as are you being a gun-toting Obama opponent who follows Rush Limbaugh, who is implicitly evil”. All irrelevant.
Also, none of which was actually SAID in the post you are replying to. I don’t think quote marks mean what you think they mean.
Some great ideas here. I like to split anything extra between credit cards and savings account. It’s always nice to see one balance decrease while the other increases.
I have not seem calender yet, but month after your “bonus” you will find “work for free” days. How to manage it?
If you get paid biweekly, there are no months when you will receive less than two checks. This is because you get 26 biweekly checks a year, but you only need 24 checks per year to get two checks per month. So there are no “work for free” days following the months when you get three pay checks. It is just an artifact of the way we divide our months up. If our months actually made sense, there would be 13 months per year with 4 weeks in each month. 🙂
I’ve lived with monthly pay and with biweekly pay, and I have to say I liked monthly better. It was just much easier to budget. I’d pay all bills for the month a few days after payday, put money into savings, and make sure I’d budgeted enough for all essential categories for the month. My money handling was done for the month and I could concentrate on the rest of my life.
This. And for the year I had biweekly I still did the bills monthly because the bills come in monthly. Generally about the time for a 3 paycheck month we needed the third paycheck.
I suppose if you don’t start out monthly it’s a good way to trick yourself into thinking you make less money, but if you’re used to making the same amount with a monthly payment it can be just annoying to readjust. Especially when you have the bulk of your savings on auto-pilot– if we’d started on biweekly instead of monthly we’d probably have put less away for retirement because we’d have thought we needed it to spend. So that extra “savings” from the third paycheck wouldn’t necessarily go to the best savings option once the IRAs were maxed out.
This is what happens with us. That third paycheck of the month goes to pay the expenses for the beginning of the next month, and to catch up a bit if necessary.
What really trips us up is that I am not only paid biweekly but that my paychecks fluctuate by several hundred dollars since I have a mileage reimbursement that is paid out on the second paycheck of the month. Right now with the way our pay cycle is, the second (larger) paycheck of the month doesn’t come until well over halfway through the month (the 20th or later).
This is what my former co-worker would always say to me, “there is no extra paycheck because one is for rent, the next is for bills and play”. And he’s right if you don’t stick to a rigid budget. However, if you have a budget of two paychecks per month, you should end up with a little bit of “extra” in you bank account at the end of the month. You can put that into savings, or you can let it sit there knowing you’re not allowed to touch it. (For me, it was about $200.) That will build up, and in 5 months, it equals a paycheck. That is the money to tide you over in the month you have the third paycheck. (Or if you transfered it into savings you put the third paycheck into savings each month.) If you don’t limit yourself to a paycheck, you never see the bonus.
For me, the 3rd paycheck was never as big a bonus as the author seems to think. The problem is when you get paid at the very end of the month, the first paycheck of the next month comes in the 12th or 13th. If I had some bills due the 6th or 9th that would have to be covered by the 3rd “Bonus” check. Would it help ease thnigs? Yes. Maybe it is because I was living close to paycheck-to-paycheck, or because I budget for food and gasoline biweekly (not half-monthly). For me it seemed only about a 1/3 or 1/2 of that bonus check was really extra.
I think the biweekly paycheck makes it easy to see if your needs/wants/savings balance is on track – when my budget was tight I always tried to keep it so my first paycheck covered all the important stuff like rent, and then the second one was savings & anything else.
I have been paid monthly, semi-monthly, and biweekly, and I strongly prefer biweekly! I have arranged my finances so that I budget this way. You can ask most places to bill you on specific dates. I have half my monthly mortgage payment come off each check, thereby automatically paying extra, as I want to get the mortgage paid early. I arranged other bills so they came in at a schedule that works for me.
This is actually how we fund a large part of our Roth’s. We put a smaller regular amount in every month and then put the entire bonus paycheck in too. Makes funding the Roth fairly painless.
I use the two extra paychecks to pay the car insurance bill and the rest (after groceries, gas and the dog savings acct) goes into a travel fund.
Wow, I never really thought about this but maybe that’s because I’ve always been bimonthly. We don’t really plan around the bonus check as a result, but now that I think about it, perhaps it’s been helping us meet some of our savings goals faster than we’ve realized!
Bimonthly isn’t the same as bi-weekly –>>
12 months x 2 paychecks a month = 24 paychecks
52 weeks / paycheck every 2 weeks = 26 paychecks
No “bonus” paychecks with bi-monthly. Of course the bi doesn’t really mean the same thing here for the terms, one means every other time and the other means twice in the term.
That’s not quite correct.
Bimonthly = every other month (so 12/2=6 paychecks)
Semimonthly = twice a month (so 12*2=24 paychecks)
The definition is context dependent. “Bimonthly” can mean both.
LOL @ the absurdities of the English language.
Meanwhile, the word “fortnightly” gathers dust in a corner.
I have always liked the bi-weekly, although I only experienced monthly pay for about 3 months. The key is proper budgeting. Breaking down the bills into what is due during the next 2 week period.
I’ve been bi-weekly for two years, and I never understood this thinking. I value every dollar of my annual salary and budget it all. I expect to receive it, none of it is bonus. If I lost two paychecks a year, I wouldn’t meet my savings goals.
I know that on paper it can look like extra money, but I don’t think it would serve me well to think about it as such. It’s like thinking of your tax refund as extra money. It’s not, it’s the money that you earned and are entitled to.
I think the point is that it’s just another way to think of your money differently and by doing so, carve out some extra. A different way of “paying yourself first.”
That is, she knows her salary, but by living on an amount that is a couple of paychecks less than her salary, she frees up 1/13th of her salary for savings.
It’s really not at all like a tax refund — she’s not giving up some of her money for up to a year. She puts it to use when she gets it.
In one sense, it’s not good to fool yourself (as you have suggested). On the other hand, if you normally get two checks a month, why not budget regularly to those two checks and treat the odd extra one like free money? Done properly, it can serve as a valuable means of enforcing spending discipline. Is it optimal? Probably not, but the best solution on paper is worthless if it doesn’t make it to practice.
My biweekly paycheques are worked into our budget – our mortgage payments are in tandem with my paycheques so we make those “extra” payments automatically.
That said, as the author points out, the rest of our budget – our expenses, other bills, student loan payments, and savings – is based on our income for a regular 2-paycheque month. So what’s left after our extra mortgage payments is, while accounted for every year, a bit like “extra” money.
Over the years we’ve done most of what’s suggested here – usually we put it against our loans, but once in a while we splurge on something we’ve had our eye on or put it towards other savings goals.
I used to get paid semi-monthly until I switched jobs and now I’m paid biweekly. Semi-monthly was better for me because I knew my direct deposit would always hit on the 1st and 15th each month while biweekly payments vary each month. It’s not the biggest deal, but a few days can make a big difference when you have automatic payments set up.
And in tomorrow’s lesson, class, we learn our colors! After snack time, of course.
No need to be rude. If what you read here doesn’t interest you, please just go away.
My office recently switched from biweekly pay to bimonthly. You would not believe the uproar with people saying they won’t possibly be able to budget when they only get paid every 15-16 days instead of every 14 (even though the paychecks will be more). It made me sad about the math and logic abilities of the general population.
Yeah, that is sad.
My first thought on reading the title of this post was, “Well, I’m paid semi-monthly and that’s pretty close to bi-weekly. What’s the bonus?” Haha, after readling, obviously that “bonus” is not present for semi-monthly. Darn. On the other hand, semi-monthly is a bonus over monthly since you get paid for your time sooner after you’ve earned the money, compound interest, potential for paying the mortgage in two parts per month, etc.
The “bonus” of getting a 3rd paycheck two months out of the year (or 4 months, which was the case for years when my husband and I got paid on alternating Fridays) is a lot like paying more tax than you need to and getting a big refund. It’s an “easy” way to save. We could always count on having an extra $1000+ pop up 4x per year.
Great post, I use to get paid every week (which is awesome!) and I wasn’t use to it because I had always been paid bi-weekly in the past. You think you get an extra 2 checks every year with switching to bi-weekly, do the math for weekly pay. It was very nice and some months I would get 2 extra checks in a month (as opposed to 4 checks, I would get 6 checks) only when the dates would play to my favor, many times I would get 5 checks in a month. My budget was set up for 4 checks per month and this worked out beautifully. First time I have seen anyone post on this topic, very interesting spin and well written.
This is the sort of good basic how-to that will be useful to readers who are new to budgeting. I have this pay schedule and use it for additional mortgage payments, although I have had other uses in the past.
edited to add: I should say that although my employer pays me every two weeks, that’s not when I receive money. My pay goes to my ING account, and I send myself a deposit on the 2nd and the 20th to my old brick and mortar bank. I could pay myself weekly if I wanted. The reason is so that all funds are captured in my ING account, which grows since I don’t send myself the full paycheck. I treat myself as an employee. I heard about this from a guest post on GRS years ago; once you have your account funded with a comfortable cushion, this works great since you don’t have to decide to save. Everything is saved, except your automatic transfers.
I haven’t decided yet what I’m going to do with the two extra paychecks. It’s between paying down my car loan and putting some money aside into an IRA. Decisions, decisions!
If you’re not living paycheck to paycheck, none of this matters. If you think of your checking account (or wherever you keep your cash on hand) as a reservoir, all you really care about is making sure it never gets too close to empty. It makes absolutely no difference whether you receive 26 little rainstorms, or 24 slightly bigger ones, or 12 even bigger ones to fill your reservoir if the total amount of rainfall is the same. It only makes a difference if your reservoir is so low as to risk running dry before the next rainfall.
It matters if you’re doing a lot of automated saving and you don’t like your reserves to get too low. That’s why I found the biweekly paychecks irritating. With monthly bills and biweekly paychecks the reserves would get lumpy and it was difficult to figure out what was actually going on each month as a spot-check to see if adjustments needed to be made.
I’d prefer smoother income.
On internships and while working part-time for minimum wage, I was paid biweekly and once, semi-monthly. Now, I’m paid monthly and I way prefer it. My budget is monthly, my savings are monthly. Having money come in less frequently means fewer times to go and move money around and it’s just way smoother.
If you can stick to a budget well, monthly is awesome. The two main complaints I hear about monthly are: 1) people running out of money before the end of the month (i.e. they’re not budgeting very well) or 2) people wanting to get their money into savings/investments quicker.
I definitely prefer semimonthly (twice a month) over biweekly since I’m getting my salary/12 each month, whereas in biweekly, I feel like I’m getting gipped off some months since what I see monthly guaranteed is salary/13, not salary/12.
So, sure, it shouldn’t matter how your reservoir is filled. But, I find it so much more convenient when it’s just once a month.
Hm, as I’m working towards getting out of debt, I always consider myself living paycheck to paycheck, even if I’m really not. I have my minimal buffer in my accout, and then I transfer everything left over into savings (as well as automatically saving). I budget for every cent, even if 50% of my income is going towards debt repayment and savings.
I guess it’s just one way to view your money, but it makes me be on top of my accounts, and I check them (and my budget) pretty much daily. And adding the little bit of excitment of an extra paycheck, kept me going when all I was doing was dumping it directly into student loans. When you’re saving all that you can, something has to keep you going.
I changed jobs, so I’m paid twice a month now. No bonus check, but with a huge pay raise, I can now live on one paycheck and save and pay down loans with the other. It’s a bonus check every month! 😀
@Audrey
I think the question is, do you need to trick yourself that you’re making less money than you actually are or don’t you.
If you do, then this is great– that extra check can be directly put towards some goal like debt repayment or an IRA. It keeps you from buying lattes or whatever you’d spend small sums on if your regular paychecks were larger. (Btw, you could trick yourself the same way by automatically taking money out of each paycheck for your debt repayment goals.)
If you don’t, then having paychecks set up like this can actually keep you from optimizing your income. You put too little away in the 401(k) and too much in savings because you’re worried about not being able to smooth consumption if an emergency hits right before you get that third paycheck. Then when you do get the third paycheck if it doesn’t go straight to refill the emergency fund then you end up not putting it in a tax advantaged account because you have those on auto-pilot (at least once the IRAs are maxed out).
On top of that, you don’t *really* know if you’re on track with spending because you’re not getting an income that is steady compared to your expenses. You actually have to sit down, figure out when the next third paycheck is and do some division.
When you’re paid monthly and billed monthly you can check the balance after you’ve paid your bills every month and see that everything is on track and there are no mistakes. If the balance is too high, you may have missed a bill. If the balance is too low, someone made a mistake somewhere. It’s an easy quick spot-check.
I suspect Tyler K hasn’t been paid biweekly after getting everything set up monthly before. I too would not have thought it was going to be a hassle until I had a year when the way I was paid was changed. I am glad to be back to monthly now.
I’ve bounced back and forth between bi-weekly and bi-monthly pay (but have never been paid monthly) over the last 10 years, and I have to say I like the bi-weekly model more.
Yes, I’m getting a bit less per paycheck when I’m getting 26 vs 24 a year, but I’ve budgeted down to that smaller check. My household monthly budget is targeted to two paychecks per month with the first check going into rent, utilities, car payment etc. The second check goes to credit card (if we have anything on them to pay off), entertainment services (netflix etc.), then the rest into savings.
So when a month rolls around with 3 paychecks, the third gets split between savings and making an extra large payment on the car.
In a way, I “budget” for the extra money too in that I know already where it’s going to go. The difference is, those paychecks aren’t accounted for or depended on for day-to-day living and regular expenses.
Interesting idea…. since I use direct deposit and direct transfer to savings, it does not matter which check I receive… all immediately go to a purpose, be it savings, rent (and in the future, my home) food or student loan payments. I was really surprised how much I was able to save in one year on a student income.
A couple things. First, I found that while I’m paid bi-weekly, my expense are usually either monthly (rent, bills) or weekly (groceries/food, entertainment), etc. While the “3 paycheck” month provides a bonus, a “5 weekend month” (assuming I do grocery shopping on Saturdays, or whatever) drives up certain categories for a month.
It’s not a big deal unless your budget is that tight, but it is worth noting.
Second, when I look at my yearly budget, I count those paychecks in everything. Logistically, it is easiest to put most of the net cash into savings.
This phenomenon, while I’ve always known about it intellectually, has only recently become something we’re being proactive about. We set up our mortgage on biweekly payments to be deducted on the same day as my paycheck is deposited (every other Thursday). So when that extra paycheck appears, a third of it goes toward an extra mortgage payment that I don’t even have to think about. (Yay for automation!) Right now, the rest of it covers community college classes and textbooks for my husband, and whatever’s remaining just adds to our savings buffer.
I don’t quite understand what you mean by pure gravy. Is the phenomenon you are referring to the fact that since biweekly paychecks are smaller, you budget less so your third check on some months can just go to savings? This would be the exact same if you had monthly checks and budgeted less: you would have the same amount of extra “gravy” on top so it doesn’t look that special to me (although I’m not working in a full-time context so I don’t know if this is quite common for most people).
Agreed. I thought this article was going to be about how getting your paychecks more often means you can start earning interest on your money more quickly than if you’re just paid once a month. However often you’re getting paid, it doesn’t affect your salary. It’s not like you get two bonus paychecks every year, you just get your paychecks on a different schedule than I get mine. What’s the big deal?
Biweekly paychecks are definitely better than a monthly paycheck. Better cash flow. I remember years (about 40 years ago), when I was paid currently on a semi monthly basis. If I was paid on the 15th, I was paid through that date. If I left on that day, I was only owed vacation time. Great cash flow.
I get paid bi-weekly (as mentioned earlier, “fortnightly”…I actually had someone ask me that this week when I was having a problem signing up for a stock savings plan..but that’s another topic!) and I don’t see the ‘third’ paycheck as a bonus check. Since it occurs at the end of the month, it means that in the next month, the check isn’t until the middle & end again. It can make planning a bit more difficult..but I use Quicken for all that – budgeting every penny.
The things that makes it even more confusing is that my employer only takes certain benefits deductions the first two pays of the month. So those ‘third’ paychecks are bigger, yes – but there’s also a bit less stability.
And to make it even more confusing only certain deductions are semi monthly (medical, dental, vision insurance, etc)…others are bi-weekly (401k, parking).
Fortunately, excel and Quicken are my friends.
When I was working, we got paid every two weeks. The medical insurance was taken out of the first two pay checks, so the third pay check in the month that come by twice a year was an extra big paycheck….and very nice too.
My 2 bonus checks fortunately (or unfortunately?) come at the same time as my 6 month car insurance bill, rental insurance renewal, malpractice insurance renewal, and property taxes. So those usually get eaten right up.
Biweekly is a nightmare for us because my husband and I both get paid biweekly and on different schedules. So I have to have THREE budgets – one for two-paycheck months, a second for MY three-paycheck months, and the final budget for HIS three-paycheck months. I hate it.
It also is NOT a financial benefit to employees, which is why employers choose it do it. For years my salary was paid bimonthly (twice a month). Then this year my company went to biweekly. I was familiar with biweekly because my husband has always been paid this way. But I had an eye-opening on the overall negative impact to employees. Consider:
– Company gets to pay everybody less throughout the year. Not until the END OF THE YEAR does it catch up to what you would have been paid on a bimonthly (better) or monthly (best) schedule.
– Vacation time, sick time, PTO time all accrue more slowly. Not until the end of the year does it catch up to what you would have accrued on a monthly or bimonthly schedule.
This is easily seen by comparing payment schedules in a spreadsheet. This payment style is NOT a bonus for workers – No matter how the companies spin it!
Think about it… if the company lays people off or someone quits, there is less to pay out in accrued vacation, and the company will have paid that person less throughout the year. If you think this calculation isn’t the core reason for any company’s decision to pay people this way you’re fooling yourselves.
Viewing this payment schedule as good because you get “bonus paychecks” seems analogous to me of the people who pay the IRS thousands of dollars extra throughout the year in order to have a big refund. The only difference, of course, is that the tax refund person has a choice. While we (employees) don’t have a choice in our payment schedules, it doesn’t mean we have to swallow the spin that this is anything other than a benefit TO the company, not from it!
K-Ro, have you considered direct-depositing your and your husband’s paychecks into a savings account, and then doing a scheduled transfer from that account to your primary checking account on a weekly basis? You end up with a fixed amount of income each week coming into your checking account, which makes budgeting very easy. Yes, the savings account balance will rise and fall quite a bit over the year, but I think it would solve a lot of your headaches.
I sat down with a spreadsheet and worked out how bi-weekly, semi-monthly, and monthly payments fall for 2012, with the first bi-weekly payment falling on Friday, January 13. For semi-monthly, I assumed payments on the 15th and 30th of each month (or the first weekday following those dates if they fell on a weekend). For monthly, I assumed payments on the last day of the month (or the first weekday following). I kept a daily running total for the total amount paid under each of these three scenarios.
On 219 of the days in the year, the bi-weekly balance was higher than either of the other two. That alone shows that bi-weekly payments are better overall.
As for bi-weekly lagging behind the other two methods and “catching up” at the end of the year, that is simply not true, as borne out by the spreadsheet I put together. In fact, the payment method that is “in the lead” on any given day bounces around quite a bit, with bi-weekly leading sometimes and lagging at other times. There was not a month that passed in which bi-weekly did not lead at some point during the month. The same holds true for vacation/sick leave accrual.
If you sit down and think about it a bit, being paid bi-weekly means that you are paid sooner for the work you have performed. The company does not “sit” on your earned dollars as long. This is particularly true when one is paid only once a month. The company earns interest on the float for up to two weeks longer than if one had been paid bi-weekly.
James, I appreciate your suggestion on how to manage with 2 biweekly paychecks. It is intriguing idea and I’m already itching to start a spreadsheet so I can analyze it.
But I think you need to take a closer look at the monthly vs. biweekly payment schedule using a spreadsheet. The employee actually is paid a lesser hourly wage under biweekly than monthly or bimonthly (I have proof by comparing my paychecks from last year and this year!). Also although there may be a “float benefit” for the company in monthly vs. biweekly, there would be little float for the company comparing bimonthly to biweekly as both are a twice/month payment schedule. However, with the biweekly the hourly rate is less – a benefit to the company, and a situation that doesn’t balance out for the employee until the end of the year.
K-Ro,
You bring up an interesting point about hourly rates that is worth exploring further. Fortunately, I saved the spreadsheet I was using yesterday to compute payments. When I created the spreadsheet, I assumed an annual salary of $60,000 since the numbers worked out nicely for the semi-monthly and monthly pay schedules. Note that I’m assuming salaried pay rather than an hourly rate. Checks from salaried pay should all be equal throughout the year, while checks from hourly pay will vary with the number of hours worked in a given pay period.
So, if one is paid monthly, one receives twelve $5,000 checks — one at the end of each month.
If one is paid semi-monthly, one receives twenty four $2,500 checks — once on the 15th of each month and another at the end of each month.
If one is paid bi-weekly, then once receives twenty two checks, each for $2,307.69, paid every other Friday. Additionally, there will be six checks scattered throughout the year where one is paid an extra penny ($2,307.70) to account for round-off.
Note that in all three cases the individual is paid a total of $60,000 for the year’s work.
Now, let’s look at the effective hourly rates for each of these cases, assuming that a person is paid for 8 hours per day, five days a week — your standard 40-hour work week.
The bi-weekly case is easiest. The person is paid $2,307.69 for 80 hours of work, for an effective hourly rate of $28.85.
The semi-monthly case is more complicated, as the number of hours worked between paydays varies from 80 to 96 hours. From the spreadsheet, I get 8 pay periods of 80 hours in length, 11 pay periods of 88 hours, and 5 pay periods of 96 hours. The effective hourly rate is $2,500 divided by each of these, or $31.25, $28.41, and $26.04 per hour, respectively. Note that over half of these pay periods result in an effective rate lower than the bi-weekly example above.
The monthly case is also plagued with variable number of hours worked per month, giving us different effective hourly rates for different months. Rather than going through the whole exercise, I will simply state that some rates are higher than the bi-weekly example, and some are lower. There is no “early in the year” -vs- “late in the year” bias to be found.
I am not convinced that the hourly rate decreases as you describe when going from semi-monthly to bi-weekly pay. Without seeing the example you described with your own pay stubs, I don’t think I can get to the bottom of what’s causing what you’ve observed. As I have absolutely no business looking at your pay stubs, I’m afraid we may just have to agree to disagree.
Best regards, and do look at the option of direct-deposit into a buffer account with weekly transfers to your primary checking account, as it really does even out any bumps in income. You know with certainty that you have $X to spend each week, and can effectively budget where all of it goes.
-edited to add buffer account recommendation
My wife and I are extremely fortunate because we are paid biweekly but we are paid on opposite weeks and the checks are near the same amount. This makes creating a budget much easier and saving easier. The only problem is that we don’t pay attention to the bonus check because is part of our every week budget, which includes putting plenty into savings. Great post and some great suggestions.
As an employer I much prefer bi-weekly. It makes for a more even routine and I don’t have to worry about Monday holidays or payday falling on a Sunday.
However, my employees complained about about the bi-weekly I did change to semi-monthly out of pity for their bad budgeting skills.
K-ro’s point about PTO was not even a consideration.
This post gets my award for dumbest headline ever. There is no bonus and the emperor is not wearing any clothes! This is just like calling an overwithholding of taxes a refund. There are many ways to manage money and how often you get paid matters very little in the big scheme of things. Sorry to sound like such a crankypants, but this post is just silly. I agree with Andrew #16 so much that hitting “like” just wasn’t enough.
Where’s the dislike button?
Yes, you could put the “savings” of budgeting for two checks a month away every month and it wouldn’t impact anything. But, I would get excited when I’d get a bonus paycheck. And the excitment of getting it was enough to feed the need I had for monitary excitement. It made me feel good to write a huge check to my student loans. It kept me going. It made me want to save as much as I could.
For some people, we need the mind games and to trick ourselves to keep us going. Wish I could find something that works equally well for eating right and excercising.
Just because it doesn’t work for you doesn’t mean it doesn’t work for others.
Honestly, this is just a mind trick you’re describing. It’s not really more money you make.
If you get paid monthly, bi-weekly, weekly, whatever, at the end your annual revenu stays the same.
It’s the same like if you would be working on a 100% place or 75% or 50% – it’s all calculated on your annual income and a standard set of hours/days which are set by law (so no playing with leap-year etc.).
At least that’s the way it’s done where I live…
I see what you are saying, however, the post is more of an explanition of another way of thinking and managing your budget to make it easier for those who get paid on this schedule.
What I get from the post is that the witer (as well as many other people who get paid in this fashion) sets their budget on 2 paychecks a month because with this pay schedule, if you devide your annual income into 12 months, it will not be accurate for most months. If you were to budget annually (deviding your annual income by 12 months) then every month will be the exact amount of money in your budget where as in real life, most months you only get 2 checks which will be less money comming in that month than you have planned for in your budget (which makes it harder to keep up with a budget if you budget every dollar). By looking at the “extra” check as a bonus, you are able to budget that check to whatever you want (extra mortgage payment, debt, vacation etc.) and living off all the others (2 checks per month), thus allowing one’s budget to be more consistent.
Yes you’re right and I understand that.
As I said, it’s a mind trick.
But the way the article is written might influence some people that just by getting paided every 2 weeks gives them more money – which is false.
Exactly. Because you aren’t actually getting (annual/24)*2 in a month. I was always short before I counted those two checks as “extra”
If you’re salary is $52,000/year and you budget $4,333 but only get $4,000, it gets complicated. It’s a personal choice but I found it much easier. I don’t blow it unless I would blow $333/mo if I got paid semi-monthly or monthly.
It’s only the same if you budget based on your annual salary. If you budget based on 2 checks/month, it’s completely different.
I plan out the whole year, but it’s much easier to deal with monthly amounts, so I make note of when those “extra” checks are coming and what I plan to do with those. Basically my working budget is (annual/26)*2 per month
I’ve been on the biweekly schedule for 6 years now. Those “bonus” checks always occur at the same time as a the arrival of a “surprise” bill. I think the last one repaired my exhaust system when the muffler fell off on payday. The timing used to annoy me, but now I’m happy that these expenses space themselves out so I can pay them without tapping my emergency fund.
I’ve been paid bi-weekly for several years now, and I find that that third paycheck of the month acts more like the first paycheck of next month, if that makes sense. It’s so late in the month that the next check doesn’t come until almost halfway through the next month.
For the past few years, I’ve been simply paying half of each estimated monthly bill each paycheck – say a $95 cable/internet/phone bill gets paid $50 from each paycheck. I always round up slightly, and when I do receive a bill with a credit of more than my regular payment (say I get that cable bill with at $60 credit), then THAT’s the “free money” that I use for savings, home improvement fund (I’m GONNA get that second bathroom!), extra mortgage principal payment, or whatever.
This way, I seem to get those little “bonuses” more often – it doesn’t much matter, because essentially, it’s a question of which account I transfer the money to.
I practice this myself. I found it a challenge to budget monthly on two paychecks but I focused on conscious spending and defining my Needs and Wants. The extra paychecks are my vacation fund which is the first time I was able to consciously set aside money for vacations. Totally worth doing if you can meet your budget commitments on two paychecks, it really does feel like gifted money when that third paycheck arrives!
Good article, I agree. I also get paid bi-weekly, and love the 2 months of the year I get that third “bonus” check. We budget to live off 2 paychecks a month, so in the two months we get three paychecks, we utilize them to build up our savings, pay for things like car insurance, vacation and Christmas gifts.
While this post is in itself mundane – I’m surprised that none of the parents with kids in daycare have mentioned the ‘three paychecks in reverse’ that happened last month. I am finally getting my budget dialed in enough to take over some of the childcare expenses – previously all the childcare expenses were paid by my husband (we have sorta joint and sorta seperate finances – it’s confusing to everyone else – but easy for us) who gets paid bi-weekly. I get paid semimonthly – so in March – I had to cough up an extra week of daycare costs – without the corresponding paycheck to go with it. 🙁 I guess I should have planned for it – it wasn’t a big deal – but having never got paid biweekly – I didn’t have the ‘bonus/expensive’ months preprogrammed in my head, so it was still an unpleasant surprise.
I’ve been paid bi-weekly for most of my adult working life and believe me, it is no bonus. That one week they hold back could be doing something for me rather than earning my employer interest (all 9 cents of it, I know, I know). And our bi-weekly schedule falls on the Friday after Thanksgiving and the Friday of Christmas week, so naturally they won’t give us our checks until the following Monday. This may work for people who budget two paychecks a month, but I hate it.
Thanks – I feel much better now!!!!
I’ve never understood why people get so excited by the “third paycheck” phenomena. You still have to live for those two weeks in between pays, right? Maybe it’s more exciting if you live paycheck to paycheck or you have a very strict budget. I guess I tend to take the long view, and think of money more in terms of quarters.
I was just thinking the same thing. If you live paycheck to paycheck, this may be exciting. Otherwise, it doesn’t really make much of a difference.
I don’t live paycheck-to-paycheck, but employ this method. At the end of the year, it’s the same, but it makes my life easier the rest of the year.
Not counting them as extra is like budgeting those two checks over six months. If you lose your job after three, you’ll be short and will have to move some money from wants to needs.
I have my first “extra” check coming up in May. I’m saving up for a down payment (hopefully a fourplex) so I’ll put it towards that. I do this with my husband’s (actual) bonuses too. He quite a few in a year (property management – so lease renewals, mystery shoppers, etc) but I don’t budget for them so that I am forced to work with a tighter budget.
If Bimonthly = twice a month how can biweekly = every second week?
It can’t, you are being paid fortnightly!
Thanks Corinne! I’m also on a bi-weekly pay schedule and love those months with a “bonus” paycheck. You’re correct that most of us budget our expenses on the two paycheck assumption so although this isn’t really “bonus” money it feels like it is with respect to our budget. I like some of your ideas on how to use the extra cash…I would generally lean towards paying off high interest credit card debt but otherwise making a contribution to your IRA or Roth IRA account is a great suggestion!
I get paid bi-weekly and use the third checks twice a year as a way to do targeted savings and pay extra on my mortgage. I take out of the third checks what I need for those two weeks for groceries, gas, spending money etc and the rest goes towards a savings goal or my mortgage. I know it is a way to fool myself to save more but it works for me.
Several years ago my company switched from paying salary employees semi-monthly (15th & last day of month) to bi-weekly, which matched how the hourly employees were paid. Personally, I preferred the semi-monthly schedule rather than being forced to budget to the two smaller bi-weekly checks each month.
What was interesting, at least from the employer’s perspective though, is I was in the Accounting department and had to start booking accruals for the unpaid days each month. Before, the salary payroll was the same every month, but after the change it varied depending on the number of days each month, which caused a lot of questions at first. What caused even more, though, was when I had to explain that with 26 bi-weekly checks the annual salaries were now being fully paid over 364 days (26*14), so effectively they had given salary employees an unintentional raise of 1/364 of their pay (or 2/364 on leap years). So, the real bonus (or hit to the company) isn’t the twice a year that you have a month with 3 checks, but every 5-6 years when you have a year with 27 checks!
The philosophy is nice, and it works for some things – but the idea that a check on the 30th is a “bonus” is really not true. Likely your mortgage or Rent is due the 1st, so guess where that money is coming from? Additionally, most people grocery shop every week, so that money is coming out too. I just find it to be incredibly annoying.
For part of the year you’ll get paid around the beginning and middle of the month, then after that 3 paycheck month you’ll go to middle and end of the month paydays for 6 months, when you get another 3 paycheck month and it reverses again.
I have been paid monthly, bi-monthly, bi-weekly and weekly and the only one I absolutely HATE is bi-weekly. It’s the worst! Those “bonus” checks actually throw your entire pay cycle out of whack until the next “bonus” check rolls around making your budget constantly in flux. What did I do with my March “bonus” check? I am holding it until the end of this month to pay my mortgage because the paycheck that used to come the week before my mortgage is due will now arrive the week AFTER my mortgage is due and will continue to do so until the next “bonus” check resets the cycle. Monthly and bi-monthly are infinitely better ways to get paid. I’m not looking forward to the ongoing money juggling of the next few months.
I get paid weekly (every Thursday). I’ve been budgeting for years for the first four Thursdays, and the random fifth Thursdays (March, May, August, November of this year) go completely to either savings or my Roth.
When you receive that bi weekly extra paycheck, it can throw off your existing time line. Most of the time, we pay the bills that are due before the 2nd paycheck comes because those bills can’t wait. With the extra we have, we split it up into categories.
My most favorite thing about bi weekly is that you can split up your mortage, car, credit card payments, etc into bi weekly payments. It lowers the interest rates and you can save a substantial amount of money. Plus you can pay those bills off much sooner than your payoff date! Our house will be paid off 8 years sooner!!
Debt(faster payoff)
Savings
Vacation/Christmas funds
We put a little in each so by the time we have enough to pay a bill off, we take from the debt amount. If we decide not to vacation this year, we save that for Christmas gifts.
To make it easier,I make up a monthly budget listing week 1 and week 2 and what our paycheck dates are. Under each week, I list all the bills including school lunches, gas, groceries, and allowance for the kids so every expense is written down. This really helps me figure out what needs to be paid and with which paycheck.When a third paycheck is occuring, I add week 3 into the budget and calculate how much we could allocate to our categories.
I love my “bonus” paycheck. I typically save, pay off debt, and am extra generous to my little sisters.
I get paid on a monthly basis and I must admit I miss getting a check every two weeks.
i dont know how any of you can bare with bi weekly or monthly pay… its fucking torture… EPECIALLY when you first start a job… holy shit. my first job was weekly pay and i made 13/hr at 40hrs a week at an easy ass and super fun job and i was living the high life getting my money every week. did another fun job that got payed less but still weekly and it was still good. now im at a boring and harder job getting payed bi weekly and waiting for my first check and i cant friggin wait!!!! i think its harder to budget on anything other than weekly.
I found that treating these checks as a “bonus” caused us to spend them frivolously more often than not. My husband and I are both paid bi-weekly, so the total of the extra paychecks are a fairly significant amount, too much for me to comfortably “waste”. Therefore this year I started putting the entire amount in savings, dividing the annual total by 12, and taking that amount out of savings monthly to add to our regular budget. The smaller monthly increase allows us to budget and spend/save more effectively than the larger bi-annual increases.
I don’t consider the “extra” paycheck to be bonus money. I fully include these extra paychecks in my budget (I just average them in monthly). I don’t know why you would exclude them from your budget- it is normal income.
My partner gets paid daily. The joy of living with tips! It was the main reason he ended up with $7000 of credit card debt, because he’d have a great night at work and wake up broke and hungover with a bar tab twice as much as he’d made.
I managed to get him to start budgeting weekly by putting the tips aside every day and depositing them once a week. But while I was working, I used my bi-weekly paychecks to budget semi-monthly as the article here indicates, and would snag that “extra” paycheck for savings whenever I would end up getting a whole paycheck ahead (i.e., if this paycheck is for May 1-15, but I get paid again before May 1, I’ve found my extra paycheck).
I’m now trying to expand the budget from a weekly system to a semi-monthly system, and I’m finding it difficult. I’m starting by taking the money in each week and making it stretch 8 days out this week, 9 the next, 10 the next, and so on. Once I get to the point that this week’s money is for bills that start 2 weeks from now, it will be easier to align the tips with the paychecks and get back on a semi-monthly budgeting system.
This “bonus” is purely psychological. If you work the same amount over the course of the year, then you get paid the same amount. There is no secret bonus. If you’re lucky enough to make 60,000 per year (I like round numbers), then you make 5,000 per month, or $2,500 per semi-monthly paycheck, or about 2,307 per bi-weekly paycheck. So if you elect to change your pay status from semi-monthly to bi-weekly according to this article thinking you’ll receive a bonus check, you’re only fooling yourself and will be surprised to see your paycheck just dropped by almot 10%.
If you’re living paycheck to paycheck, then you want and maybe even need to be paid ASAP whether that’s daily, weekly, or bi-weekly, as soon as you possibly can in order to pay you living expenses for the right now.
If you make enough to budget, then there’s almost no difference whatsoever unless you make so much money that the 1/12th of 1% of interest actually adds up to something. In that case, you might benefit the same as the person living paycheck to paycheck by getting it ASAP and immediately depositing your millions into your good investments.
Bottom line, for the majority of responsible adults who live on a budget, how often you get paid makes no actual fiscal difference whatsoever. It’s all in your head, just like people getting excited for the tax refund at the end of the year. If you’re smart, you took that money in a larger paycheck during the year and have only a very small tax bill owed to the IRS. Any time you get a refund, you just gave Uncle Sam an interest-free loan for the year, and he’s finally paying it back…
so what happens if your paid bi-weekly but you don’t stay with the company for a year? Will you be losing money? Since you don’t get that extra check on that month that has 3.
Do not completely understand this concept. My husband has been paid a salary, paid on the 1st and 15th for years. Worked out great for us. Now they have changed it to bi-weekly. I understand the couple extra months of getting what you are calling a bonus check. I can not understand how it is a bonus when he is a salaried employee. What he will make will be no different it will just be distributed differently. So I see no bonus check.
Okay, this article is written vaguely and I think, a little misleading. It insinuates that because there are three fridays in march, you get an extra in april and thereby leaves the reader wondering if there is an extra paycheck in any given month with 3 fridays. You don’t get an extra paycheck every time there’s 3 fridays in a month.. you get exactly 2 per year. It’s April-ish & September-ish depending on your bill pay schedule.
So, Mr or Ms Roth- you are welcome, I researched your article for you.
When we receive checks the 1st and the 15th of each month, our check on the 1st include worked hours from the 11th (same month)to the 26th and the paycheck of the 15th counts your working hours from the 26th (previous month )to the 10th. Your check can include hours work the previous month and hours paid will always vary. Sometimes that sucks but you will recover next check, just need to work another two weeks on a tight budget that is why it sucks.
This was kind of cute but I’m not such an optimist. Maybe you’re a glass half full type of person and I try to be as well but I find people who live paycheck to paycheck have a hard time adjusting when they’re payroll is changed from one cycle to another simply because they’re not working with a lot of money in the first place so every dollar counts. Hearing that it all works out in the end is usually of little solace to someone who is trying to determine how to stretch a buck even further. You talk about the the months in the year with three pay periods like its some secret phenomenon when you say “Don’t’ believe me, Have a look at March”lol. It’s actually just the way the calendar is because some months have five weeks. If you’re paid weekly you would have 5 pays those months instead of four. If you’re paid bi weekly you’ll get three checks instead of 2 but you’re salary is calculated by an annual figure divided by 52 if weekly, 26 if bi-weekly, 24 if semi-monthly and 12 if monthly. It’s the same salary just divided differently depending on your pay cycle. Semi-monthly pay eliminates the mystery 2 weeks and then you would be receiving your monthly salary divided by 2.
They’re not really free pays. For example. These are gross figures btw. If you earned 50,000.00 per year your gross pay would have been the following depending on your pay cycle.
Monthly: 4166.67 12 pays
semi-monthly: 2083.33 24 pays
bi-weekly: 1923.07 26 pays
weekly: 961.54 52 pays
Now if you were accustomed to 4166.67 monthly and you switch to a bw pay cycle you’ll now be working with less monthly for most months since you get 1924.07 2 x per month for a total of 3846,14 for 10 mons of the year and 2 months of the year you’ll have the third pay check of 1923.07 for a total of 5769.21 So if you were accustomed to a monthly pay of 4166.67 you’ll need to adjust to having 320.03 less per month to work with for 10 mons out of the year but for 2 months of the year you’ll have an extra 1923.07 to work with when you finally adjust. So initially it may be a bit painful but yes it can feel like a free pay check but it actually is just making up for the pain you felt the rest of the months working with less. It balances out at the end of the year. If you’re going from weekly to biweekly you may see less money as well due to higher taxes because you’re paying taxes on the gross amount but will be the same amount annually. It all balances out in the end it’s just adjusting to a different juggling act. The few hundred dollar loss per month can be really painful to some and seem more significant than the extra 1923.07 they’ll get twice in the year. It’s often difficult for people to ever build momentum and they feel in a constant state of catching up so much so that rarely does the extra paycheck seem to be enough to get you out of the whole you’ve dug trying to adjust to the 320 dollar loss
With most people living paycheck to paycheck, these fluctuations can be quite hard to adjust to because you are paying bills on a monthly basis and now for most months you’re forced to do it with 320.63 less in your budget at your disposal. That 320.63 could have been someone’s car payment it’s that significant and last I checked they won’t let you pay your car payment twice a year when you receive that extra pay. If you can adjust yes that can feel like a bonus check twice a year but more often I find it’s usually the check people use to catch up on their bills that are late paying because of trying to adjust your budget to account for the monthly loss of income.
My experience: Payroll Merrill Lynch & Co. Inc 7 years and Bank of America 3 years. 2 years spent exclusively in payroll tax and international payroll tax. 5 years were spent in payroll garnishments so I often saw the result of these types of changes in people’s salary. My husband just went from weekly pay to bi weekly and it’s quite painful to adjust to. Payday was Thursday and it was often a life saver knowing there would be money in the bank each Thursday. Somehow we’re struggling to make it to the end of the second week. It’s all the same amount of money in a year but it’s all what you’re accustomed to. Most people are living beyond their means just trying to pay for a mortgage and car payment, car insurance taxes, etc. especially in states like NY and NJ where the cost of living and property taxes are ungodly. I’m sure there are worse places I just can’t think of any off the top of my head and I can speak for what we go through I can’t speak for someone else. All in all if you think about a dollar you earn and how many times the govt takes taxes on that same dollar it’s mind blowing. From the employment tax to inheritance tax they’re taxing us to death
You are correct in all you say. We need to do something about the government taxing us to death. They have lined their pockets for way to long and bringing us all down so they can really control the people. We the people should be taxed once on the dollar and no more! I say get our guns ready if Trump don’t win, because we will be taxed even more. UGH!