What to do with 'extra' paychecks

By Liz Pulliam Weston

If you get paid monthly or twice every month, the following column won't help you much. But if you're paid weekly or every other week, you could learn how to give your finances a serious boost with your "extra" paychecks.

Most months have two pay periods if you're paid biweekly and four pay periods if you're paid weekly. But four months of the year include an additional week -- thus, the potential for "extra" paychecks.

When you'll get these checks depends on when you get paid, but in 2007 the months of March, June, August and November all have five Fridays. If you're paid every other Friday, then in two of those months you'll get three paychecks instead of just two. If you're paid every Friday, you'll get an extra check in each of those months.

If you budget based on a regular four-week month, those extra checks can feel like a windfall that can help you save, pay down debt, cover big bills or even splurge.

Here's what some posters on the Your Money message board do with their extra checks:

• "Family CFO" uses the first extra biweekly check to pay for summer vacation costs and the second (which tends to occur late in the year) to cover Christmas presents.

• "Spoochin" pays an annual life insurance premium with one biweekly check and uses the second for a year-end church donation. "Any leftover money is put (in an) emergency fund, my daughter's college fund or toward any outstanding bills," Spoochin wrote.

• "afewthoughts07" usually puts one of the checks in savings and uses the other "to buy a splurge or two for me. Since I do our budget … based on 2 paychecks a month, it doesn't affect our overall plan."

• When "Emma14201" got extra checks, she made an extra mortgage payment. (Now she's paid twice a month.)

• "Firebird21" used the checks to buy textbooks. "When I was paid biweekly (I'm not now), I happened to be in school," Firebird21 wrote. "I had a separate book fund and I would put my 'extra' paychecks into it. The amounts were not enough to be substantial savings but I found that it made my life a lot easier every semester knowing I had a paycheck's worth of a head start on my books."

Of course, some folks base their budgets on the number of checks they actually get, which precludes the notion of getting "extra" checks.

Play some mind games

Poster "Tuppermom," whose husband is paid biweekly, or 26 times a year, totals up all their bills for the year, including regular monthly expenses as well as bills that are due less often, like insurance payments and holiday expenses. She divides the total by 26 and puts that amount every payday into a checking account devoted solely to paying bills.

"Anything above that amount gets dumped into (a second checking) account for groceries and 'fun money,' " Tuppermom wrote. "Thus, there is never actually an 'extra' paycheck."

Others, though, like the psychological trick of not counting on the extra checks, saying it helps them save. Like Tuppermom, poster "pennylover" totals all her bills for the year, but divides by 24 instead of 26 -- resulting in two "extra" checks to supplement savings.

"I have totaled all recurring bills for the year and divided that number by 24," pennylover wrote. "That is the amount of money I have automatically transferred from each paycheck into a separate checking account. I have set up all bills (mortgage, utilities, car payment, property taxes, insurance, IRA etc.) to be automatically drafted from that account (I do not write any checks). The money allocated from the two extra paychecks a year sits in that account as an emergency fund."

If you're carrying credit card debt, particularly if it's accruing at double-digit interest rates, you should probably use Tuppermom's approach of budgeting based on every paycheck. You'll want to send as much money as possible each pay period to the credit card companies to retire your high-cost debt, rather than waiting for twice-a-year "windfalls."

Likewise, if you're not saving enough for retirement, you're better off boosting your contributions every payday and putting that money to work for you in the investment markets as quickly as possible.

You need a plan

If you'd like to benefit from "extra" checks, though, try this approach:

Figure out how much you need to cover your regular monthly bills. Total up all your regular monthly bills and divide by two. That's how much you need to set aside from every regular paycheck to cover your monthly "nut." If you have trouble keeping track of how much of your balance is available for other spending, consider transferring this amount to a separate checking account reserved just for bill payments.

• Video: Everybody needs an emergency fund

Now add up your irregular bills during the year. This includes any bill or other expense that isn't due monthly, and can include everything from taxes to insurance premiums to holiday presents to back-to-school supplies. Divide the annual total of all these expenses by 24, and arrange to have that amount transferred out of your checking account to a savings account twice a month.

Adjust as needed. You may have been using your first paycheck every month to cover a big bill, like your mortgage or rent payment. Give yourself more wiggle room by paying that bill "ahead," setting aside enough cash from the second paycheck of each month to cover the next month's shelter. You'll have one very tight month as you get ahead this way; that might be a good time to try our "Buy Nothing Month" experiment.

Plan for the extra cash. When your regular bills are covered, you can put your "extra" paychecks to good use. How you deploy them depends on your budgeting system and your financial priorities; the important thing is to have a plan and follow through when the money actually hits your account.

Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published June 25, 2007