As advantageous as a biweekly pay schedule may be to The Man, it sure is a pain to us wage slaves. Creditors expect to be paid once a month, not whenever our biweekly paycheck shows up. Because biweekly pay dates precess throughout the year, they don’t coincide neatly with due dates for bills. No matter how accommodating your utility company or credit card provider tries to be, there’s no way you can schedule bill due dates to be sure enough money will be available to cover every monthly payment. Why? Because you’re never paid on the same date. Some months, the second paycheck arrives after bills start to come due.
The phone bill is due the first of the month, and Qwest, my only uncooperative creditor, absolutely will not change the billing date. All my other bills come due on or after the 20th. Most months, two paychecks have arrived by the 20th, providing enough to cover all my regularly recurring household and insurance bills plus the credit card charges for groceries and routine living expenses.
But a look at the Great Desert University’s payday calendar shows problems arise in April, May, June, and September. In April, GDU doesn’t disburse its second paycheck until the 25th. By then, an American Express bill is due; I budget $1,500 for food, household, yard, gasoline, and such, all charged on AMEX. Usually I spend about $1,100 or $1,200. Utilities and other regular recurring bills can run as high as $840, especially in the summertime, when the costs of water and electricity track the thermometer. AMEX closes on the 20th and the check needs to be mailed by the 1st. Visa closes before then (sometimes I’m forced to use Visa if I have a lunch meeting at a restaurant near the campus—few of them take American Express). Power, water, insurance, and the Renovation Loan are due on or shortly after the 20th. With as much as $2340 due, I need that second $1,522 paycheck by the 20th, not whenever GDU gets around to paying me.
Meanwhile, each month I have to put into savings $300 a month to cover annual property tax, homeowner’s insurance, auto insurance, and car registration; $200 a month to put into the Renovation Loan payoff fund; and $175 for extras such as clothing and to cover emergencies such as vet bills, car repairs, and house maintenance. So in any given month, I’m disbursing up to $3,015 out of a $3,044 income. With $29 to spare, that’s too tight to cut corners.
But in April, we’re not paid until the 28th! That paycheck has to cover bills that have already come due and cover the $87 Qwest bill due on May 1. It also has to cover half the monthly savings setasides: $337.50. I don’t get paid again until the 9th, when again I set aside half of all the monthly expenses and savings. But this doesn’t cut the mustard: In May I again go unpaid until after my monthly bills come due. Same thing happens in June. And in September. And in October. In every one of those months, I wonder if enough cash will be available to pay my regular bills!
Another consequence of this annoying system is that I never know how much is left over from a month’s worth of pay, making it impossible for me to “snowflake” the Renovation Loan. With bimonthly pay, checks posted on the 1st and the 15th. Each check covered the same two-week period. So, on the 31st, I could look at my checking account’s bottom line. Any amount left after all my expenses were paid was mine. It either went into my diddle-it-away savings or, more recently, it went to snowflake down the Renovation Loan. But now the cash remaining in my account on the 31st has to last me until a week or 10 days into the following month. Who knows whether there’s any disposable money there?
I need to be paid on a bimonthly basis. I finally figured out how to swing that. If my employer won’t pay me bimonthly, I will.
Here’s how it works:
- Set up a savings account and a checking account.
- Try to get as many of your creditors as possible to bill you after the 20th-as late in the month as possible.
- Arrange to have all EFTs taken from the checking account, and pay for all other bills and living expenses from that account.
- Make an accurate estimate of all your monthly expenses. For amounts that fluctuate, such as power and water bills, use the largest amounts to figure these estimates.
Starting in a month when you get paid on or very near the 1st:
- Have your pay deposited to the savings account. (Or, if necessary, transfer the entire amount from the account that receives it into the savings account.)
- On the first of the month (or the payday that comes closest to it) pay yourself 1/2 of the estimated amount of your monthly expenses. Put this in the checking account, which serves as a “cookie jar” to hold funds to pay expenses.
- Bills that are paid before the 20th should be covered by this amount.
- When your 2nd biweekly check comes in that month, again pay yourself 1/2 the estimated monthly expenses. Try to pay yourself on the 15th. Because twice a year an “extra” paycheck arrives, your “pool” in savings eventually makes this feasible.
- Bills that come due after the 20th should be covered by this amount.
- On the last day of the month, transfer your monthly savings to whatever instrument you’re using (money market account, mutual fund, stocks & bonds, etc.)*
Now put your entire biweekly paycheck in the savings account as it comes in. Then pay yourself bimonthly from the fund that accrues in the savings account, by transferring the amount you need to live on from savings to checking and the amount you want to save from savings to the desired financial instrument.
The effect of this is that you should always have enough in checking to cover your regular expenses. If any money is left over from your monthly budget, you will see it in your checking account.
But because of the precession of the biweekly pay, over time extra money will also accrue in the savings account. You can determine this leftover amount ONLY in months where you get paid on or near the first. In my case, that’s January and July. It looks as though after about six months of this, something like $1600 of unused money should collect in the account that receives automatic pay deposits.
If you have my arithmetical skills, too, you can start paying yourself a bimonthly salary only in a month where you get paid on or near the first. Otherwise it’s impossible to make the transfer needed to cover the first two weeks of the month in any comprehensible way.
Here’s how this looks, over the second half of 2008:
Green type shows what is in the “Inflow” savings account. Black type shows what gets transferred to checking to cover expenses. I start in July, because we get paid on the 3rd, which is pretty close to the start of the month.
We’re not quite on track to “pay” me on the the 1st and the 15th, because GDU doesn’t cough up the paycheck until the third. In August we do get paid on the 1st. Not only that, but on the 29th we get a so-called “third” paycheck, which is not really three paychecks to cover a single month’s expenses but simply the check that, in a bimonthly world, would have been paid on September 1, arriving five days out of synch with the following month’s billing cycles.
In July, things are pretty tight. If I’m lucky, I’ll have $29 left from my July paychecks. Mercifully, in August a small miracle happens: we get paid on the actual first day of the month. So, that $29 doesn’t have to cover the $87 phone bill. This puts my monthly pay-me system on track. After I’ve paid myself on the 1st and the 15th, I still have just enough cash in the inflow savings account to cover the monthly savings setasides of $675; that amount isn’t actually coming out of the the August 29 paycheck, which now starts to form a “pool” from which I will pay myself bimonthly.
In September, things start to get interesting. After the three paychecks in August, we end up with $1,609 in the inflow savings account. We don’t know how much, if any, of that is “free” money, not committed to paying October bills, it has to stretch until September 12. The September paychecks, due on the 12th and the 26th, are totally out of synch with bill-paying reality, and so there’s no way for an English major to understand what’s what here.
Not until December do we see clearly how this is working out. All the December bills and savings setasides are covered by December 15, with $164 to spare. Then on December 19 another paycheck comes in, bringing the inflow savings balance to $1,684.
But… We see from the payday calendar that GDU cuts the next paycheck on January 2. In other words, January paychecks coincide with the actualities of monthly billing. The January 2 and January 15 checks will cover all January bills, and so that $1,684 is not needed to pay expenses! It amounts to six months’ worth of snowflakes, and it can be used to pay down the Renovation Loan or put into savings. w00t!
Not being an accountant or a mathematician, I have no idea how this works. Evidently forcing bimonthly pay from the biweekly paydays must capture one of the so-called “extra” paycheck every six months. When you disconnect your monthly “pay” from your biweekly pay, somehow you recover the 25th and 26th paychecks that otherwise would have to serve to cover their own two-week periods.
Biweekly paychecks come on or near the first of a month only a couple of times a year. But this is apparently the only time when you can be certain of how much unspent income has accrued.
It’s a damnable nuisance, of course, all the shifting of funds. But this system-pooling biweekly income to pay yourself bimonthly-works to cover your bills reliably. It ensures that the money to pay your recurring obligations will be available when it’s needed.
* Although in Quicken I “pay myself first” by posting transfers into savings and mutual funds on the first of the month, I delay making the actual transfers until the end of the month, so the cash will be there to cover unexpected budget overruns or small emergencies. Posting the transfer at the start of the month shows a balance after the savings setasides, which keeps me from overspending except in emergencies.
6 Comments left on iWeb site:
I’m so happy I’m paid monthly.
Thursday, June 19, 2008 – 01:29 PM
I’m confused by some of your terminology… “bi-” means “every other…”, and “semi-” means “twice a…” The title of your article is “Make bi-weekly pay work in a bi-monthly world” which says “Make an every-other-week payday work in an every-other-month world.” I don’t know many people who could get paid every other month and survive! Certainly not me! 🙂
Should that be “Make biweekly pay work in a semi-monthly world” meaning, get paid every other week, when twice a month would be more conducive to bill-paying?
Friday, June 20, 2008 – 08:45 AM
Actually, in current usage “bimonthly” is correct. My Random House Webster’s, for example, defines “bimonthly” both ways: “2. occurring twice a month”; and “5. twice a month, semimonthly.”
A discussion of this usage appears with the entry for the prefix bi-. “Most words referring to periods of time and prefixed with BI- are potentially ambiguous. Since BI- can be taken to mean ‘twice each’ or ‘every two,’ a word like _biweekly_ can be understood as ‘twice each week’ or ‘every two weeks.’ Confusion is often avoided by using the prefix SEMI- meaning ‘twice each’ (_semiweekly; semimonthly; semiannual_) or by using the appropriate phrases: _twice a week, twice each month, every two months, every two years_).”
I usebimonthly to mean “twice a month” because that’s how my employer uses it and it’s how HR people and payroll accountants across the nation use it.
Saturday, June 21, 2008 – 06:30 AM
I just pay half of my bills each payperiod. I’ve been doing this with online billpay, and I’ve had no problems at all. The only thing it doesn’t work with is my rent. I have to save half of it.
Tuesday, June 24, 2008 – 04:14 PM
Okay I really don’t like your solution very much.There is a better, easier way to do this.
What you do is save ALL your paychecks from month 1 and then pay ALL your bills on the 1st of month 2 that will/are due in month 2.
The concept of “living off last months income” is a great way to operate, and is anthemed by followers of “The YNAB Way” over at http://www.youneedabudget.com./
Wednesday, June 25, 2008 – 01:45 PM
@ Sally: It’s never occurred to me to ask my creditors if they would accept half-payments. Besides, how would you know how much to pay? Creditors send out a bill once a month, not twice a month; and except for the phone company (whose bill is always the same because I don’t make long-distance calls), every statement is different. The power bill ranges from $80 to $180, for example.
@ PKSublime: Unclear how what I’m proposing here differs much from YNAB. Over six months, you would end up with the equivalent of one paycheck residing in your account (a little more, if you spend less than you earn); over a year you’d have a full month’s worth. That would happen because of the payday precession, with no effort on your part. With YNAB, it appears that the amount you would set aside to pay down debt or build savings would have to go to build a month’s worth of extra living expenses. It would take you quite a while to accomplish that. The scheme above lets you start right now, with no waiting period while you build a stash. Personally, I’m put off by the blatant commercialism of YNAB: pay us and we’ll tell you our secrets (which appear to amount to “budget, pay off debts, live within your means, build savings.” Thanks…I’ll figure it out for myself.
Thursday, June 26, 2008 – 05:25 AM