For workers accustomed to receiving paychecks every other week, the calendar has been adjusted to November to give some biweekly wage earners a third paycheck as a “bonus.”
If you are living on your monthly paycheck, having an extra paycheck each month can be very helpful. We provide financial tools to help you establish or add to your emergency fund, pay off high-interest debt, pay for vacation expenses, and more. Additionally, in some cases, you may want to use this additional salary to support multiple financial goals.
For example, let’s say you earn $5,000 a month before taxes and withholdings, get paid biweekly, and after paying all your monthly expenses, you’re left with $100. But the month you receive your third paycheck, you’ll get an additional $2,600.
5 smart ways to take advantage of your “extra” paycheck
1. Start or add to an emergency fund
An emergency fund can help you pay for necessary expenses if something unexpected happens. Perhaps you could try saving a little at a time with split direct deposit, where your employer deposits a portion of your paycheck into your savings account through direct deposit. Alternatively, you can use your third paycheck or bonus to build an emergency fund.
For this account, you should consider a high-yield savings account from an online-only bank. Banks that are federally insured by the Federal Deposit Insurance Corporation (FDIC) and guaranteed by the National Credit Union Administration (NCUA) to ensure your money is protected within their respective limits and guidelines. Please use a credit union that accepts this.
According to a December 2023 Bankrate survey, only 44% of U.S. adults have enough emergency funds to cover emergency expenses of $1,000 or more.
2. Pay off high-interest debt
The current high interest rate environment is good for savers, but tough for borrowers. Variable interest rates are very high, and if you take out a loan now, your annual percentage rate (APR) will likely be high as well. Therefore, paying off high-interest debt can save you a significant amount of money. And you can use that money to take advantage of solid savings account yields, currently the highest in over a decade.
Let’s think about this another way. If you’re earning 5% APY on your savings account but paying 20% in interest on your debt, your savings yield is only part of the picture. Paying off your biggest debts first and not having to pay 20% interest is a big financial win.
To pay off a $1,000 credit card balance at an annual rate of 20 percent, you’ll pay $111 in interest in one year. But if you didn’t have that debt and earned 5% annual percentage yield (APY) for one year, you would earn $50 in interest.
That means you can save a little bit and put a little more toward high-interest debt. And at some point, your savings will truly be money that you earned, rather than the sense of accomplishment of saving money deprived of interest on a loan.
3. Increase contributions to retirement accounts
Contributions to retirement accounts are usually adjustable. Some people may want to earn extra pay and increase their contribution rate to their 401(k) during the month.
This could be a temporary increase if your employer allows it. If you can use this extra money to permanently increase your 401(k) contributions for the year and use your extra paycheck to pay for expenses throughout the year, that’s even better for your retirement savings.
So if your annual income is $100,000, a 6 percent contribution to your 401(k) would be about $231 per paycheck. If you increase your contribution to 8%, it’s about $308. So, if you’re paid biweekly, your extra paycheck can cover a $154 increase in your monthly 401(k) contribution.
You can also contribute funds to an IRA or IRA CD.
4. Continue making additional checks throughout the year.
Based on the example above, the extra $2,600 divided by 12 comes out to be about $217 more per month. In the meantime, your money can earn interest in a high-yield savings account until you need it.
5. Save for future big expenses
Taxes and insurance are two types of expenses that can be very expensive, so it makes sense to budget for them.
Property taxes may be billed quarterly, auto insurance biannually, and homeowner’s insurance annually. Therefore, it may be helpful to set aside money for these irregular large expenses. Payment plans may also be available for some products, which may result in additional charges and increased costs if you do not pay your invoice in full.
What are the 3 payroll months in 2024?
Those who are paid on a biweekly basis will receive three pay months based on their first paycheck of the year.
| first salary | first three paydays | 2nd 3rd payday |
|---|---|---|
| January 5, 2024 | March 29, 2024 | August 30, 2024 |
| January 12, 2024 | May 31, 2024 | November 29, 2024 |
Those paid weekly will have five pay months in March, May, August, and November in 2024.
How to budget to maximize the benefits of extra pay
Creating a budget helps you prepare for irregular payments, such as taxes and insurance payments. Although you can predict when you will be charged these fees and the approximate amount, you may not be able to predict the amount of the increase.
“Even if you can’t use your entire paycheck right away, if you’ve budgeted to live on one paycheck less than what you would normally receive that month, you should do so within the next month or so. You can put all that money toward productive uses like paying down debt or increasing your savings,” says Greg McBride, CFA, principal financial analyst at Bankrate.
If your employer only deducts benefits from your paycheck twice a month, the extra pay can be even higher, said Chris Snyder, director of eastern SMB operations at payroll provider Paychex. .
“It depends on how the employer wants to set up deductions for certain benefits offered to employees,” Snyder says.
Put your extra paycheck into a high-yield savings account with an online-only bank
Savings accounts offered by traditional big banks typically don’t offer competitive yields. As of the week of October 14, the national average yield on savings accounts was 0.58% (APY), according to Bankrate institutional research.
That’s why it’s worth considering allocating some of your extra paycheck to a high-yield savings account. Compare banks and find the one that’s right for you.
Opening a high-yield savings account can be used in conjunction with some of the strategies listed above. Also, try to use an account that doesn’t pay fees that can eat into your interest income. You can easily find high-yield accounts with no monthly service fees at some of the largest online-only banks that are FDIC-insured.
conclusion
A month of extra pay can make a huge difference to your household finances. Generally, there are only a few times a year when you can make more money than usual in a month. That’s why you can build an emergency fund, pay off high-interest debt, open a retirement account, divide up any extra money you have throughout the year, or prepare for large payments during irregular periods. You can also save money.
