It Matters How Often You Are Paid
In order to properly budget your money, you must understand exactly how much and how frequently you are paid. Misunderstanding the ebb and flow of money coming and going out of your bank account causes all kinds of problems. These include overspending, increasing your credit card debt, overdraft fees, and general sense of uncontrolled finances. This post will address how the frequency of your income impacts all of these factors and more.
A Little Background
Most American households are living paycheck to paycheck, according to a recent survey from CareerBuilder. Living paycheck to paycheck affects people at all income levels including many middle-income households. The survey found fifty-nine percent of all households making $100,000 or more spend more than they earn. This means every month they are accumulating debt.
I speak to people every week who can’t seem to keep their bank balances in the black between paychecks. They will write checks knowing it will bounce and they will likely incur overdraft and low balance fees. There many factors as to why this occurs. I have found there is a disconnect between total monthly take home pay and how much money they spend monthly.
Why Does it Matter How Often I am Paid?
It has to do with the timing of your take home pay. Some months you may receive more money than others. People who try to budget don’t always account for this.
Most people get paid bi-weekly. That’s two paychecks a month. Except for two months out of the year, when they receive three. (52 weeks in a year means 26 paychecks.) This means that ten months out of the year, the take home pay is the same. Except for two months there is an extra paycheck.
[bctt tweet=”If you are like most Americans who live paycheck to paycheck, then how often you are paid makes a big difference in your budget.”]
To be fair, most people don’t do the math when they are budgeting for the year. Instead, they will divide by twelve and think that is what they take home monthly. When they do it this way, they wonder why they are short most months. This is why preparing a cash flow statement is so critical.
Let’s Walk Through an Example on Take Home Pay
Let’s assume your salary is $80,000, which is about equal to $56,000 take home pay (deducting 30% for taxes).
- If you do a simple division, you would expect ($56,000 / 12 months) $4,667 to pay your bills.
- Compare it to getting paid every other week. You would take home ($56,000/26 pay periods) $2,154 every other week. This would be ($2,154 x 2) which is $4,308 for most months.
- The difference is ($4,667 – $4,308) $359. Quite a lot of money if you are on a tight budget.
What if you are a getting paid $150,000 per year? You might take home about $90,000 (deducting 40% for taxes).
- If you divide by twelve, your take home pay would be $7,500
- If you get paid every other week, your take home pay (for ten months out of the year) would be $6,923.
- The difference of $577 could pay for tolls and gas for the family car and perhaps a few other expenses. It can also mean $577 worth of expenses are likely being charged to your credit cards resulting in increased balances.
The Good News about Being Paid Bi-weekly
If you watch your spending closely and only spend the two paychecks you receive monthly, then you will have two extra paychecks a year that can be used for a variety of things. You could use the money to:
- Build your emergency fund
- Make an extra mortgage payment
- Use it as a reserve for your next vacation
- Set aside money for a down payment on your next car
- Start a college savings account for your kids
- The options are unlimited
Lessons Learned about Paycheck Frequency
It is important to understand how much money you are taking home every month. We sometimes gloss over the frequency of our paychecks. If you are paid bi-weekly or even weekly, your take home pay is not the yearly total take home pay divided by twelve. For most months out of the year, the amount is less. This is significant, if you are like most Americans who live paycheck to paycheck. It could be one of the reasons you cannot make ends meet.
As an employee, you don’t have a choice as to how often you are a paid. You do need to understand how it impacts the amount of money you have every month to pay your bills and financial obligations.
Understanding your cash flow is one of three cornerstone personal financial statements that everyone should know how to prepare. To learn more, see our blog post on the importance of a Cash Flow Statement.