Depending on your pay schedule, you might find yourself with an extra paycheck this month!
It doesn't matter if it's an extra paycheck, a bonus, an inheritance, or a surprise cash gift from your parents – you need to have a plan in place for any “extra” money that you receive.
Without a plan, your money can quickly disappear, and you will be left wondering where it all went.
Every time I look at someone's finances, one of the first things I look at is not only how much they get paid, but how they are paid. How someone is paid (bi-weekly, weekly, monthly) is extremely important because it can have a massive effect on your savings, your budget, paying off debt, and building wealth.
So, let's talk about this extra third paycheck.
WHY IS THERE A THIRD PAYCHECK?
If you are paid every other week (bi-weekly schedule), you will receive two paychecks every month, except for the two months of the year when you will get three paychecks.
Due to how the calendar works, you will end up getting 26 paychecks, not just 24. Usually, we think each month contains four different weeks, and if you do the math, four weeks over a twelve month calendar year equals 48 weeks. But in reality, each month is four weeks and a few days, which results in 52 weeks every year – giving you two months out of the year where you will receive three paychecks instead of your usual two.
If you are paid weekly, you usually get 52 paychecks per year, which means you will get four paychecks in eight months and five paychecks in four months.
WHAT TO DO FIRST
To prepare for the months where you will receive an extra paycheck, you need to find out which months contain three paychecks instead of two.
Take out a calendar and write down your paydays for each month. In any given year, this will tell you when to expect a third paycheck.
It's different every year, so knowing when it will happen makes it much easier to create a plan for the extra income.
WHAT SHOULD YOU DO WITH YOUR THIRD PAYCHECK?
Ultimately, you decide what to do with your money. You tell your money where to go so it can be spent on things that are important to you.
If it were me, I would start by building up my emergency fund. Your emergency fund is critical to a healthy budget, and it will end up saving you in times of need more than you think.
Start with $1,000 to $2,000 in an emergency fund, so you are covered just in case your income is short one month, or you need help paying a more significant expense like rent.
If your emergency savings is funded, you need to think about what's happening in your life at the time you receive your third paycheck.
What are some significant expenses you're expecting in your life right now? Are there any unavoidable costs coming up such as new tires, annual subscription costs, or travel arrangements that you need to cover?
Use your third paycheck to cover these unavoidable expenses so you can avoid going into further debt.
KNOW YOUR PRIORITIES
What do you want to accomplish with your money? Do you want to pay off debt? Do you want to save more?
If you want to achieve your financial goals, you need to make them concrete.
For me, I write down a list of everything I want to accomplish financially, and then I rank them in order of importance.
Recently, I was on a mission to pay off credit card debt. Now that I have accomplished that goal, I have moved on to my next goal of savings.
If your emergency savings is funded and all of your upcoming unavoidable expenses are covered, then I would use your third paycheck on your current financial goal, whether that's paying off debt or saving more money.
CREATE A PLAN NOW
The key is to make a plan for your third paychecks well ahead of time so that you spend your money on things that matter to you.
Being successful with your money means you have to be proactive. Making small changes with your money, like deciding what to do with your third paycheck ahead of time, can have significant rewards down the road.
I want you to accomplish your financial goals, and feel secure with the income that you have, instead of continually playing catch up.
So today, I want you to look at your calendar and figure out when you are going to receive a third paycheck and start creating a plan for that extra income.
When the third paycheck does come, you will be able to tell it where to go instead of wondering where it went.