Smart Ways to Use an Extra Paycheck
There are several ways that an employee can be paid. Weekly will result in an extra paycheck 4 times a year. Bi-weekly will result in an extra paycheck 2 times a year. Other employees get paid either semi-monthly or monthly and don't get the benefit of an extra paycheck. I say benefit, because for many people it is considered extra money.
Some people budget monthly and will do the math and figure out exactly how much they need to spend monthly, even though they don't get paid monthly or semi-monthly. I think this is difficult, because at some points of the year you need more money for the month than you have actually gotten paid. Too confusing for me!
So if you are one of the people who get an extra paycheck a few times a year, what are the best things you can do with it? Of course you need to cover your basic living expenses during this time like food, gas for the car, etc. but as for bills; they are typically covered by the other checks you received that month. So before you go shopping to spend money like a mad person, let's talk about some ways that you can spend, and save, your hard earned money that will benefit you in the long run.
First, it isn't really a bonus from your boss. You worked hard for this money, so think carefully about what you need to do with it. How can you better your financial position with this extra paycheck? Paying off debt is a great way to start! However if you have no money in savings, I would actually recommend you stashing it in a savings account and refusing to touch it unless you have a true emergency.
If you already have money in an emergency fund, then paying off debt will most definitely be my next recommendation. If you have a debt that you can pay off completely with this extra paycheck go for it! That is one less bill you have to worry about each month and you are freeing up cash to use for more pressing needs, like paying off other debt. If you don't have a debt that you can pay off, then send it in as extra principal towards whatever debt has the highest interest rate.
Now before you think I am a total scrooge, I do think that people need to be rewarded for their hard work. So if there is something small that you have cut out for the time being in order to get ahead, then by all means treat yourself to that one time and send the rest to debt or savings. For us we don't eat out often - a combination of saving money and fewer headaches because eating out with 4 small kids is not frugal or much fun - so frequently when we get an extra paycheck we go out to eat. For you it might be a movie, do whatever floats your boat, but make sure to reward your self in some small way for your hard work. You want to make sure you stay motivated in your efforts to save money and payoff debt.
Other options for extra paychecks include stocking the pantry, paying your car insurance for 6 months to avoid the extra fees of monthly billing, getting needed repairs done on the house or car to save money in the long run, and setting aside money for Christmas so that you will avoid charging gifts on the credit card. Depending on your situation there could be many other options that would be good uses of your money.
Taking the time to plan ahead of time and thinking through all your options is the best way to handle the extra paycheck. Don't get tempted to go out and start spending money until you have a plan. Think about all the details of your financial situation and then decide what would be the best use for your money. Then enjoy doing the smart thing with your extra paycheck.