The Best Way To Budget An Extra Paycheck
Are you paid every two weeks? If so, you will receive an extra paycheck twice every year. So what is the best way to budget an extra paycheck? Keep reading to find out.
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Before I started budgeting and paying attention to my finances, I never realized when I received an extra paycheck. I was just excited that it was payday and spent my money on anything that I wanted at the time.
Since I didn’t have a plan, any extra money was gone before I had a clue that it came from an extra paycheck.
It always sounds like fun to go crazy with extra money, but when the money is gone, you have nothing to show for it.
When you have extra money in your bank account, no matter the source, it is a good idea to have a plan. Otherwise, you will end up wondering where all of the money went.
How do you get an extra paycheck?
Since there are 52 weeks in a year, bi-weekly employees receive 26 paychecks every year, and weekly employees will receive 52.
If you get paid weekly, you will notice that you receive four paychecks in most months, and four times per year, you will receive five paychecks.
Bi-weekly employees get paid every other week, which is typically two paychecks a month.
Two times per year, some months have five full weeks, which equals an extra paycheck.
The two months that you receive extra checks are different each year, depending on the day you get paid.
How to budget an extra paycheck
The first step to budgeting an extra paycheck is to determine which months out of the year you will receive the extra paychecks since this changes every year.
The best way to do this is to use a calendar. Take a pen and circle all of your paydays for the year.
Marking each payday allows you to quickly see the months you will receive two paychecks as well as the months with an extra paycheck.
When you have this information, it’s time to decide how you want to budget your extra paycheck.
Before you get started, it is a good idea to determine your financial goals.
Use a notebook to write down the things you want to accomplish with your money and rank them in order of importance.
Once you have determined your goals, create a plan for your money, and stick to it.
Ways to budget an extra paycheck
Now that you have your financial goals in place, here are a few good ideas to help you reach them with that extra paycheck.
Get current on bills
Being behind on bills sucks. If you’re in this position, use the money from your extra paycheck to get current on all bills.
The one thing I took from Financial Peace University is always to cover your four walls.
The four walls include food, shelter, transportation, and necessary clothing.
Once these things are covered, use any extra money to bring all of your bills to a current status.
Pay any overdue amounts as well as the bills for this month. Prioritize your payments if you don’t have enough money to get current on all bills.
Get ahead on bills
If you’re already current on your bills, an extra paycheck means you have a bit of money to get ahead.
One of my goals in 2014 was to live on last month’s income. I was able to accomplish this by saving extra money until I had enough to cover a full month of expenses.
Even if your extra paycheck isn’t enough to cover a full month of future expenses, it is a great way to get ahead on bills coming up soon.
Being ahead on your bills will give you a sense of security and motivate you to reach financial goals.
Increase your emergency fund
Emergencies happen. There is no way to avoid them, but you can prepare for them.
If you don’t have an emergency fund, now is a great time to start one. I recently came across an article that said 60% of Americans couldn’t cover a $1,000 emergency.
Use your extra paycheck to start or add to your emergency fund. Make sure to save at least $1,000 for emergencies.
If you already have an emergency fund, make a goal to increase it by 30% using your extra paycheck.
When you have your emergency fund in place, only use this money for real emergencies and be sure to replace it.
Pay down debt
Paying down debt is a huge deal. Between student loans and credit card debt, a huge chunk of most people’s income goes to debt.
Imagine what your life would look like without debt. If paying off debt is one of your financial goals, use your extra paycheck to get rid of these bills.
Start with your small debts and pay as many of them as you can with your extra paycheck. Paying off smaller debts will free up money in future months to pay towards the debt with higher balances.
You will save a ton of money on interest and reach debt freedom faster than your original goal.
Add to your sinking funds
One thing that keeps me from taking on additional debt is sinking funds.
Sinking funds are just small funds that hold money for something you know will come up.
Take car maintenance, for example. You know you will need an oil change and new tires at some point.
Create a sinking fund for that, and the money will be there when that time comes.
Sinking funds are an essential part of a financial journey.
Add money to your sinking funds with your extra paycheck, and you won’t risk adding additional debt while working towards your financial goals.
Treat yourself
This one might sound crazy, especially if you have debt, but another way to use an additional paycheck is to treat yourself.
I’m not telling you to go crazy and spend all of your money, but I do think everyone should enjoy their money at some point.
Do you want to have a spa date or buy a cute pair of shoes? Work these fun things into your budget with your extra paycheck.
What is the point of this financial journey if you can’t enjoy a few things along the way?
Add to your retirement account
Depending on where you are in your financial journey, you may be ready to save for retirement.
As long as you are current on your bills, out of debt, and have an emergency fund in place, adding to your retirement account is a great idea.
A retirement account is one of the best places to put your money when you have taken care of all other responsibilities.
Add money from your extra paycheck to your retirement account and watch it grow. Your future self will thank you!
The bottom line
It always feels great to have a plan and feel in control of your money, especially when dealing with an extra paycheck.
You have the option to blow the money or use the funds to help reach your financial goals.
No matter what you choose, be sure to use your monthly budget and your best judgment to make financial decisions.
With careful planning, you can reach your financial goals at a faster rate by using this extra paycheck to fund your goals.
What do you plan to do with your extra paychecks this month? Let me know in the comments!
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