I am on the “every other Friday” payroll, as with many people around the United States. This year, September is the second of two months where I get three paychecks. Because I am used to two paychecks per month, it is like a bonus check.
What do I do with my bonus money? Great question! Here are my ideas for the best use of a third paycheck.
Extra Loan Payment
I often write about paying your loans bi-weekly rather than monthly. There are a couple of reasons for this. First, you match your income stream to your expenses. If you don’t get paid monthly, why should you get hit with a giant loan payment monthly?
Second, paying every payday saves you mortgage interest. Loan interest compounds daily, so paying more often will lower the compounding effect and save you money.
But, twice a year, you will make an extra half payment. That equals one full extra payment per year. That helps you pay down the debt faster, build your equity faster, and save a ton of money on interest over the life of the loan. If you want, you can even round up your payment for a faster payoff.
You can save up to $5,000 per year in a Roth IRA. Most people do not do that. With two extra paychecks, you can make a big dent.
Do you have an emergency fund saved up? What if you were fired tomorrow? How long could you survive? If the answer is less than three months, you should put that extra paycheck into a savings account for a bad day.
I have a long life list with big goals on it. Many of them involve international travel. Some involve taking up new hobbies or skills that require expensive equipment or classes. An extra paycheck goes a long way toward a flight to Europe or a set of DJ turntables.
What do you do with the third paycheck if you get one? If not, what would you do with it? Please share how to save money in the comments.
Image by Mark Strozier / flickr