The Two “Extra” Paychecks You Get Every Year
For those of you who don’t already know, I’m bigly into personal finance. Even before I opened my first line of credit back in 2013, I’ve been obsessed with quantifying my finances. I get excited when Credit Karma notifies me of an update to my credit score. I sprint from the mailbox to my letter opener when my 401(k)’s quarterly earnings reports arrive.
When I moved to Houston, I decided it was time to create a new spreadsheet to analyze my finances. I started the project because I wanted to create one harmonious summary of my earnings along with a visualization of where it all goes, since it seems to disappear so easily! I was tingling with excitement when I clicked ‘Create’ on that first pie chart.
Naturally, the area I started with was that between my gross income and take home pay. That big section titled “Deductions.” I wondered, what portion is going to taxes, my pension, my 401(k)? As I’ve progressed through training as an air traffic controller and seen significant raises on my journey to Certified Professional Controller (CPC) status and pay, I’ve watched those figures grow and grow. As a personal finance nerd, I couldn’t simply allow myself to gloss over all those numbers and jump straight to that wonderful line showing how much would be hitting my checking account in a few days’ time.
With each deduction itemized out on the spreadsheet, I set to categorizing. That’s a tax, that’s retirement savings, and so on. I was pleased to finally see exactly what happens between my gross income to take home pay, even if I was a little unsettled by how big a chunk actually goes to Uncle Sam.
With that task satisfied, I continued onward. I thought, “Okay, well if that’s what’s left over in each paycheck, how much do I actually take home in a year?” It’s a question that interested me because, at least in the United States, we tend to focus our attention about earnings around the month. Most bills are invoiced monthly, so naturally our budget habits follow. This, paradoxically, doesn’t line up with how most of us are paid—bi-weekly.
If you’re in this majority, you might be tempted initially to answer the question of your annual net income by multiplying your paycheck by two, to arrive at your monthly earnings, and then multiply again by twelve. I suspect, however, that some of you may have noticed the error in this calculation. For those who have, well done. For those who have not, you’ll learn at least one new thing today! The error is, of course, that there are 52 weeks in a year, and therefore 26 bi-weekly pay checks per year. This is in contrast to a bi-monthly pay schedule, where employees would be paid 24 times per year. For bi-weekly employees, this means two “extra” paychecks per year. These manifest in the form of two months each year where employees receive three paychecks. Having said all this, a bi-weekly employee can correctly calculate their annual take home pay by multiplying their bi-weekly take home pay by 26.
What’s interesting about this schedule is that it necessitates employees plan their monthly expenses around only two paychecks. After all, ten out of twelve months will only see two. It’s not possible to access that “extra” money at any time. In a sense, that money is locked away from the employee for most of the year.
I found this discovery wonderful. Provided I go about my life depending only on two paychecks per month, I will end up with two sudden infusions of cash every year, for which there is no designated purpose. Who would argue against a whole extra paycheck from time to time? Being unaware of this fact explicitly, though, diminishes, if not eliminates, its utility. You may be inclined to spend it indiscriminately if you are unaware of its coming.
Since discovering this fact, I’ve found it both helpful and satisfying to come up with a plan for what I want to do with the extra money before it draws near. For that, you’ll need to:
- Figure out which two months of the year the extra dough will come in. For this, consult the payroll calendar in your office. If one doesn’t exist, and your colleagues don’t know what you’re talking about, you may have luck inquiring with HR.
- Decide what you’ll do with the extra money! So far, I’ve put mine into a rainy day fund, a vacation fund, new furniture, and a gaming PC.
- If you don’t already have one, open a savings account! Once the extra green hits your checking account, you’ll want to move it out of there ASAP so you avoid the urge to spend it on other things.
Enjoy your own money!