If you get paid bi-weekly, you usually have two months out of the year when you receive that magical third paycheck. Rather than those who are paid bi-monthly and receive their paychecks over 24 pay periods, biweekly folks receive their paychecks over 26 pay periods that are slightly smaller. However, this sets you up for great success if you play your cards right.
Your third paycheck is likely a larger than the other two, and that’s because several pre-taxed things like your health insurance are not taken out of this third check since they’re taken out of the first two. That’s even better for your savings.
If you’re doing your monthly budgeting, you already know your monthly expenses, when your bills come out or are due each month, and how to survive on two paychecks each month (not including partner or spousal income if applicable). This is why those three check months can benefit your personal financial goals immensely. Even though this is earned income, you should view it like an expected cash windfall—where you can use this income to speed up your money goals.
Before you start transferring all your money over at the end of this month, remember that you still have bills to pay. If you’re a renter like me, you likely have ~25% or more of your monthly income leaving your account around the first of the month. That’s why you need to start planning for those three paycheck months when you receive your second check of the month.
So as usual, you’ll save half your second paycheck for next month’s expenses (rent, I’m coming for you). And for your “bonus paycheck”, you’ll save half for next month as well. If you’re paid on the 30th on your three-paycheck month, you’ll apply half your third check to the next month and you can save the rest). If you saved half of your second paycheck for the following month’s expenses, as you usually do, and now save half of the third paycheck for next month’s expenses. you’ve now successfully gotten half a month or more ahead on your bills. That doesn’t mean you can go spend that extra money on whatever you want come next month’s first paycheck—I mean, I guess you can…but the freedom that comes with already having the buffer of money in your account instead of waiting for your next payday to pay your bills is SO worth it. I promise.
Now, what should you do with the other half of your third paycheck? Here are some suggestions.
- Place that money in an emergency fund.
If you don’t have an emergency fund of at least $1,000 in your savings account, you’re not doing yourself any favors. Give yourself peace of mind with that cash buffer so when something bad happens, you’ll know you can pay cash and not take on any new debt.
- Pay on your debt snowball.
If you already have an emergency fund, pat yourself on the back—because 40% of those in the United States don’t have the funds to cover a basic emergency in cash. Once you’ve established your fund, throw any remaining income at your debt with the lowest balance (hence, the snowball). The faster you pay down debt, the sooner your paychecks can be spent or invested in the things you want–not by repaying debt.
- Save for other financial goals.
If you already have an emergency fund and are 100% debt free (minus a mortgage and maaaaybe some student loans), save up for other financial goals you have like a fully funded emergency fund (which includes 3-6 months of expenses), or maybe for a new-to-you car, for expected medical expenses, a down payment for a house, or start your wedding fund if you’re thinking about getting married.
- Contribute to your ROTH IRA, if you have one.
I’m going to create a future post about the benefits of a ROTH IRA to other retirement accounts, but if you have one of these—and you have a regular emergency fund, a fully funded emergency fund, and are also mostly debt free, throw that extra money at your retirement. Your future self will thank you.
- Treat yo self (a little, not a lot).
The idea is to not get burnt out on your #debtfree journey, so you don’t have to be rigid with your money all the time. Sometimes treating yourself helps keep you dedicated to pursuing your financial goals. I personally will take 3% of that third paycheck and do something that makes me happy–but if you really want to push the limits, look into creative ways to treat yourself for free—such as walking in the park, dancing, writing, checking out a book from the library, taking a bubble bath, or disconnecting from social media for a few hours.
Keep on saving, savers.