This guest post from Corinne 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 with all levels of financial maturity and income.
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?