It is every budgeter’s dream come true…an extra paycheck! When you are the recipient of such a windfall, your first reaction might be excited…but then what? How would you budget an extra paycheck?
As someone focused on finances, one of the first things you need to do is to determine the best way to utilize your “bonus” paycheck. An unexpected sum of extra money can make a HUGE difference in your financial goals if you choose to spend it wisely.
Here are some things to consider about the best way to budget an extra paycheck.
How to Budget an Extra Paycheck
The stars have aligned, and you have an extra paycheck (or two!). You’re looking at your extra paycheck with a budgeting mindset, want to put the money to good use, and are ready to get one step closer to your big financial goals…here are some specific ways you can use your extra paycheck to get ahead.
Emergency Fund
If you haven’t already done so, an extra paycheck would be an ideal tool to begin (or increase) your emergency fund. I recommend that an emergency fund has, at minimum, $1000. Your bigger financial goal should be to try to build your emergency fund up to 3-6 months of living expenses. You can take part or all of your extra paycheck and put it towards this goal. A well-stocked Emergency Fund will give you peace of mind AND keep you from getting behind in a future emergency.
Catch up on bills
An extra paycheck can also help you to get on top of your bills. Even with the best intentions, we sometimes need to catch up on paying bills. You might have unexpected medical bills or want to pay ahead on recurring utility bills, make an extra car payment, or add to your Roth IRA. An additional check will help you get ahead (and with money, every little bit helps!).
Extra debt payment
Whether you are paying off debt by doing a debt snowball, a debt avalanche, or the 50/30/20 method, you can use your bonus paycheck as an extra debt payment. A more significant payment will help you feel like you are making real headway on paying off your debt. It is also a good idea to help improve your credit score by making extra debt payments.
Save for vacation
An extra payment can also be used for something fun, like a vacation. To make your vacation more budget-friendly, put money bit-by-bit into a special savings account earmarked for a vacation or use it for a more inexpensive (but just as fun!) getaway. The earlier you start planning your vacation, the more you will know about costs and how much you need to save.
Stock your pantry
A well-stocked pantry can give you peace of mind and also help lower your grocery costs in future months. Use some or all of your extra paycheck to stock up on food items you know you will use.
Start a side-hustle:
If you are business-minded, you could use your extra paycheck to start a side business that could add consistent extra income. Using money to make MORE money with side gigs is an excellent idea.
Save for other big goals
I am a massive advocate of big financial goals. Dreaming big can inspire us to work hard and be financially prudent. If you have a big goal you are working towards, put your extra paycheck towards your goal.
Purchase clothing needs in advance
Buying clothes (for yourself or your kids) during end-of-season sales can be very fruitful…but it isn’t always financially feasible. One smart way to use your extra paycheck is to take advantage of sales to buy ahead for the next season. Purchasing next year’s snow pants and boots (remember to size up appropriately!) at the end of winter, and buy swimsuits and shorts at the end of summer. Just don’t forget where you put your new clothes when the time comes to wear them!
Emergency Preparedness
No matter where you live, having supplies available in case of a natural disaster or emergency is essential. You can use your extra paycheck to purchase 72-hour kits for your family or to buy emergency supplies like a hand-crank radio, flashlights, or extra water.
Give to a good cause
While all of these ideas will have you feeling good in one way or another, giving all or part of your extra paycheck to a cause you support will be the best feeling ever (and has tax benefits!). Make sure to research a non-profit that will spend your donation responsibly.
Help a friend or family member
We’ve all struggled at some point. Financial help from friends or family is a true blessing. If you can pay it forward financially by helping out a friend or family member who is in need, you’d be using your extra paycheck in a beautiful way.
Reward Yourself
Staying on a budget is hard work, and rewarding yourself for doing a good job can help you continue to stay on track. If you have an extra paycheck, you could earmark some money for rewards like date night or even a product you’ve been eyeing. Stay on budget for six months? Buy a new outfit with the extra paycheck money that you set aside!
Why would you have an extra paycheck?
Extra paychecks can happen for a variety of reasons, including:
- Additional weeks: When you are paid weekly, any month with five weeks might result in an extra paycheck. If you are paid bi-weekly, there will be two months out of the year that you have an extra paycheck (26 weeks of pay).
- Bonus: Your company might have a profit-sharing bonus (paid monthly, quarterly, or yearly), or you might get a bonus amount for meeting a goal and/or exceptional effort.
Let’s say you operate on a monthly budget with the assumption that you are paid four times each month. If you follow Frozen Pennies advice and give every dollar a job in a zero-based budget, then by the end of week four, your pay has been all used up.
But wait! It’s a five-week month, and you are getting paid on the FIFTH Friday of the month. That is an entire paycheck you haven’t yet put into your budget. Woohoo!
Is an extra paycheck really EXTRA?
Well, yes and no! If you are paid a salary, you might argue that an extra paycheck isn’t unexpected. However, when most of us budget, it is based on our take-home pay…not our salary divided by 12 months, 24 pay periods, or 52 weeks. This means that your entire salary isn’t necessarily figured into your budget.
This is why planning and being aware that something like a two-paycheck month or even a three-paycheck month is possible. Handling the second or third paycheck is an essential part of budgeting and one of the first steps in controlling your checking account. Instead of squandering the extra monthly income because we had no idea what was coming, we could plan exactly what we want to do with the money and use it to help us get ahead financially.
Which months might have an extra paycheck?
Your pay schedule will help you work out if you have extra full paychecks coming at any time during the year. That will let you know how much money you have to spare at the end of the month.
You get 26 paychecks during a 52-week year if you are paid bi-weekly. That means there are two months out of the year that you will be receiving an extra paycheck. You can factor this into your bi-weekly budget.
Now is a great time to take out a year’s calendar and figure out when (and if!) you’ll get an extra paycheck this year. Mark your paydays on the calendar and note the months when you have more than two (if you are paid weekly or bi-weekly).
Once you’ve done that, the first thing to do is to make a plan!
How to keep a budgeting mindset with an extra paycheck
If you are new to living on a budget, you might lean towards using your extra paycheck to splurge…but think about how this can help you get ahead!
I’m a big proponent of setting financial goals to keep motivated with budgeting. Keeping these “big picture” goals in mind can help us through the nitty-gritty and not-so-fun part of staying on a budget.
If you have a budgeting mindset, you will see all of your income, whether expected or not, as a tool to get you closer to achieving your financial goals.
A refresher on how to balance a checkbook for your main bank account might be helpful. Do people still do this?
You might not be there yet, but when you are inclined to splurge, revisit your big financial goals. Picture yourself accomplishing them, whether that means paying off your student loans, putting a downpayment on a house, or taking your family on a vacation. No temporary splurge will feel as wonderful as accomplishing the big financial goals that you have set for yourself!
Final thoughts on how to budget an extra paycheck
An extra paycheck can be a real boost towards achieving your financial goals, getting ahead, and rewarding yourself for a job well done. By determining when we might get an extra paycheck, deciding ahead of time what to do with those extra dollars, and following through with our plans, an extra paycheck can be a fantastic tool in our financial tool belt.
It can be a great time to consider things like savings goals, paying down credit cards, or your general financial situation. But remember that these may be your regular paychecks, and the money has to last until the following month, so all of your usual monthly expenses must be covered. That car loan is still going to need to be paid!
The Tightwad Gazette’s Guide to Frugal Living in 2024