If you’re paid bi-weekly on Fridays, then this month might be a 3-paycheck month for you. It happens roughly twice per year for those workers who are paid every other week, and for many of us, it’s like winning a small lottery jackpot.
But rather than squander that occasional 3rd paycheck in a month, use those funds to help bring your personal finances into balance. Here are 5 suggestions for getting the most out of that extra paycheck:
- Build your emergency savings fund. Experts advise every consumer to save 3 months’ income in case of an emergency or a period of unemployment. Unfortunately, the economy is still in a major slump, and the average period of unemployment is actually almost six months. So if there’s any danger of job loss or interruption of income in your family, you should try to set aside six months’ worth of income to weather any long-term crisis. No matter how much you may need to save, the odds are very high that you haven’t set aside enough cash for an emergency-most people haven’t. So if you don’t have an emergency savings fund in place, or yours isn’t fully funded, then this is your first order of business when confronted with an extra paycheck.
- Pay down debt. If you’re working to pay down debts, then the question of using an extra paycheck becomes a no-brainer. Those extra funds will help you get out of debt that much faster, and save you money in interest and fees down the road. Go ahead and pay down those debts before the extra money gets frittered away on something else.
- Make an extra house or car payment. Generally, it’s a good idea to make an extra payment every year if you can afford it. One extra mortgage payment per year per year can shave 2-3 years off of a typical mortgage, saving you tens of thousands of dollars in interest expenses. Making an extra car payment every year can also save you thousands over the life of an auto loan, depending on your particular turns.
- Save for important goals. Are you raising kids who will be college-bound someday? Start a 529 savings plan. Saving for a car or home purchase? The larger your down payment, the better interest rate you’ll get, and that will save you money over the life of the loan. Even something like a vacation or season’s worth of gift purchases can be a worthy savings goal for your surplus income.
- Invest. If you’ve got your emergency savings fund in place and feel okay about the status of your debts, consider investing extra income for your future. Start a Roth IRA, mutual fund, or even contribute extra to your 401(k) retirement account.
When extra money comes along, don’t treat it like a windfall to be wasted on frivolous purchases. That money is income that you earned, and it should be used judiciously, just like every other dollar you earn. Whether you pay down debt or save it for the future, when you do the right thing with your money, the positive impact is multiplied.
To learn more about creating a budget that works for you, check out our “Power of Paycheck Planning” seminar right here in the FIT academy.