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A step to improve the finances

Mrs. Micah issued a challenge to readers and bloggers to describe one step, no matter how small, that they are taking to improve their financial situations. As a matter of fact, I’ve come up with something but haven’t had time to blog about it, what with the past week’s technoadventures.

Thanks to a reader’s comment, I figured out how I could pool my biweekly paychecks so as to “pay myself” on a bimonthly basis. This ensures that there always will be enough money in the account that dispenses payments, by EFT, to the utility companies, the Renovation Loan lender, the life insurance provider, and the long-term care insurer, and it allows me to fund the “piggy bank” account for credit-card charges once a month: on the first, rather than on whatever cockamamie date a paycheck arrives.

First, I funded a dormant checking account at the credit union with my state income tax refund of $1340, almost as much as one of my paychecks. I added another couple hundred bucks to bring this bankroll up to the amount of a single paycheck.

July’s first payday happened quite close to the first. I put that check in the newly grubstaked “pool” account. This brought the balance to the amount of one full month’s pay.

From that I funded the “piggy bank” account for the credit-card budget and the account that dispenses automatic payments-not with half of what is needed but in full, for the entire month.

Friday, July 18, was this month’s second payday. The credit union, apprised of my new scheme, automatically transferred the paycheck into the “pool” account. That brought the balance back up to the equivalent of one full month’s pay. On the 31st, I’ll make my regular transfers for savings from the “pool”: to the Renovation Loan repayment fund, to the property tax/homeowner’s insurance/car insurance fund, and to indulgence savings.

In Quicken, I renamed all my credit union accounts so my titles jibe with what the CU calls them at its online site, simplifying the books and cutting the likelihood of making an error.

Next time I’m at the credit union, I’ll arrange to have automatic transfers from the “pool” made on the 1st and the 31st. Ta DAAAA!!! No more fiddling with online transfers.

Everything except paying the credit card bills will be done automatically.

No more fiddling with Quicken and manual transfers. No more worrying about whether enough cash will hit the credit-card “piggy bank” to make the monthly budget. No more hating GDU’s ever-changing bimonthly pay schedule.

Now that’s what I call stress relief!

A Square Peg in a Round Hole: Biweekly pay in a bimonthly world

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:

  1. Set up a savings account and a checking account.
  2. Try to get as many of your creditors as possible to bill you after the 20th-as late in the month as possible.
  3. Arrange to have all EFTs taken from the checking account, and pay for all other bills and living expenses from that account.
  4. 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:

  1. 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.)
  2. 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.
  3. Bills that are paid before the 20th should be covered by this amount.
  4. 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.
  5. Bills that come due after the 20th should be covered by this amount.
  6. 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:

!wanda

I’m so happy I’m paid monthly.

Thursday, June 19, 200801:29 PM

Seeking Clarification

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, 200808:45 AM

vh

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, 200806:30 AM

Sally

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, 200804:14 PM

PKSublime

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, 200801:45 PM

vh

@ 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, 200805:25 AM

Living on Biweekly Pay in a Bimonthly World: Ten steps closer to sanity

Item: Biweekly pay does not correspond to the world we live in, where bills are due monthly.

Item: Because we pay our recurring bills monthly, we naturally calculate all the rest of our budget items-such as groceries and home maintenance costs-on the same monthly basis.

Item: Biweekly paychecks move around. They precess in such a way that eventually one of them will miss coming in at a time when we need the money to cover monthly bills. This precession is the reason we end up with the two so-called “extra” checks a year, which are not extra at all but simply cover two weeks during which we otherwise would starve.

Item: This disconnect between biweekly pay and financial reality adds up to one huge budgeting headache.

After much gnashing of teeth, I finally figured out how to deal with this, based on one startling Insight: a monthly grocery and incidentals budget does not have to run from the 1st to the 31st. It can run over any 31-day cycle . . . say, over the period of a credit card cycle. A credit card represents a tool that gives you the versatility to stay on budget in the biweekly environment, and automatic bill pay lets you schedule most recurring payments so they will be covered by your salary. Here’s how:

You need the following items:

  • A paid-off credit card with a billing cycle that closes late in the month
  • Three bank or credit union accounts: two accounts you can write checks on and one a savings or money market account with the best interest rate you can wangle
  • Online access to the same
  • Automatic paycheck deposit into the checking account
  • Automatic bill paying from that same account

Your checking and savings accounts should be in a credit union or other institution that does not dream up ways to gouge you for making transfers, writing checks, or in other ways using your own money to suit yourself.

Start this process with a pay period that occurs near the beginning of a month.

Step 1. Calculate the total of your monthly recurring bills. If some, such as utility bills, change from month to month, base this calculation on the highest amount likely to occur. For example, I do not have my electric bills prorated over the year, because while the summer bills are just barely affordable, the spring, fall, and winter bills are so much lower they leave me with significantly more spending money during those seasons than I would have on the prorated plan. So, my figure for total recurring bills includes the highest probable summertime power and water bills, plus loan payments, telephone bills, etc. The total comes to about $880. In the wintertime, the difference is available for Christmas presents, purchases in holiday sales, paying down debt principal, and savings.

Step 2. Figure the amount you need to put in savings for bills such as insurance that occur annually or biannually. Because my house is paid off, I have to set aside $300 a month to cover property tax, homeowner’s insurance, and car insurance.

Step 3. Figure any amount you wish to pay toward loan principal. I try to pay $250 a month extra.

Step 4. Figure the amount to go into monthly savings toward an emergency fund to cover extraordinary expenses. In the biweekly regime, that amount has dropped from $200 to $170 a month for me.

Step 5. Calculate the amount you can afford for food, household expenses, gasoline, the dog, the cat, the kids, weekend do-it-yourself projects, repairmen, eating out, and all other ordinary daily living expenses. In other words, this category includes everything other than savings and recurring bills, and it all will be racked up on a credit card that must be paid off each month. In my case, this amount comes to $1,500 a month, or about $375 a week.

Step 6. Arrange to have your paycheck automatically deposited to your checking account.

Step 7. Arrange to have all your recurring bills automatically deducted from your checking account as late in the month as you can manage: preferably around or after the 20th.

Step 8. Each time a paycheck is deposited, immediately go online and transfer 1/2 of the month’s amount needed for savings into your savings or regular money market account; transfer 1/2 of the amount needed for daily expenses into the second account on which you can write checks (I use a money market checking account); and leave 1/2 of the amount needed to cover one month’s recurring expenses in the first checking account. You must do this promptly after your paycheck is deposited.

In most or all months, your recurring monthly bills are now covered, because they will not come due until after two paychecks have been deposited. You also know exactly how much you can spend for daily expenses, and you have safely stashed away your regular savings.

Step 9. Charge all daily expenses on one credit card whose billing cycle ends late in the month. Because your credit card bill is not due for a week or so after the closing date, you get a float that insures two paychecks will cover your budgeted routine spending.

Step 10. Divide your routine daily living expense budget into four periods, spanning the billing cycle (in my case, this runs from the 21st to the 20th, since the cycle closes on the 20th). Each of these mini-periods is about a week long; in my case, this gives about $375 to spend each week. Set up a spreadsheet with four columns, each representing seven or eight days of the billing cycle. Place the budgeted weekly amount at the top. As you make charges, subtract each charge from the weekly budget, so you will know how much you have left to spend at any given time.

If you overcharge in one week, you will need to cut the amount available in the following week by that amount. In other words, if I spend $400 in the first week, the amount I have to spend in the second week will be $25 less than the $375 budget, or $350. To make this work, you must enter your charges at least once a week.

If you make the final day of the billing cycle a no-spend day, everything you have charged will likely clear on the coming statement. So, when you pay your bill, you’ll cover all of one month’s living expenses.

Use the amount you set aside for daily living expenses to pay off your charge card in full at the end of the month. Any amount you have left over in the “daily living expenses” account can go toward paying off debt or directly into savings.

Here’s what timing your daily living expenses to your credit card cycle does for you: Even though you may not have a paycheck to cover groceries needed three days after the cycle closes, on that day you are not drawing from the paychecks already in your account. The amount in your account will cover the statement winging its way toward you, so the charges you make after the close of the cycle will not overdraw your checking account. The money to cover the next billing cycle will arrive before the end of that cycle, and so you’re still using your salary to cover your expenses. It means that, as long as you stay within each billing cycle’s budget, you do not have to go hungry or run up finance charges in months when biweekly pay does not cover monthly expenses.
Are you paid biweekly? If you are, how do you go about making biweekly paychecks cover a monthly budget?