At one point in my life, I was on a biweekly pay period schedule that occasionally caused me to be paid three times in a month. Of course, at that time in my life, I was an utter fool and I would spend the money on a big splurge, like, say, a weekend trip to Chicago with four friends in which we stayed in a huge suite and also had box seats at Wrigley Field.
At the time, I thought that I was having a great time and making memories for a lifetime, but when I look back on things like that, I just shake my head and wish I had it to do over again. The best part of the experience was spending time with friends, not dropping almost a thousand a night on a hotel room and watching a paycheck that could have been building my future flutter away into the night. That third paycheck in the month could have been something to build a foundation with – instead, I used it extremely poorly, something that I began to regret even before my financial meltdown.
Along thise lines, a reader sent in this interesting question recently:
Like many others who are on a bi-weekly pay period, I have three pay periods coming up in June. Any suggestions on a strategy for best utilizing this occurrence?
Here are the options I would recommend, starting with the best choice.
Pay off debts This is really only effective if it comes with a commitment to eliminate debt, but if you truly are committed to eliminating debt, using the third paycheck solely as a debt elimination tool is the best option. This is especially true for high-interest consumer debt. Use the check to pay off the higest interest debts you have and make a commitment to avoid credit card debt and other consumer debt.
Create an emergency fund An emergency fund is a wonderful thing to have because it protects you against the unexpected: a car breakdown, a washing machine replacement, a job loss, and so on. In essence, just take the check, toss it into a high-interest savings account, and wait for a rainy day to use it – it can transform a disaster into a mild discomfort.
Invest it This is a great option if you have a long term goal. Put the money into an index fund and just forget about it until you need it. It will ride the market until you need it in ten or fifteen or twenty years, whenever you’re ready to spend it.
Save it On the other hand, if you have a clearly defined medium term goal (like buying a car), it would be worthwhile to save it for that purpose. Put it into a savings account and wait until you’re ready to make the move.
Spend it on capital improvements This means investing it on some sort of home improvement project, something that holds value. Repaint a room, have some new siding installed, or something that improves the value of something that you own. This won’t help much in the now, but it will help in the long run.
There’s also the option of donating it to charity, but this option is highly dependent on your own personal values.
The worst option, from a personal finance standpoint, is simply spending it on something fun and immediate, but there are other perspectives to consider and money spent on fun stuff if you have your financial bases covered can be well worth it.
In short, what you should do with that check depends on what your financial state is like. Spend some time considering what to do with it – just don’t spend it on something that will fall through your fingers like sand.