January is a five-Friday month, and for many people who get paid every other Friday, this means three paychecks this month! (The people who get paid on the other Fridays will need to wait until May for their next three-paycheck month.) What are you going to do with your third paycheck? Pay off debt? Invest it? What you should do depends on your situation.
Cash Flow Your Budget
Most people who are trying to pay off their debt will want to apply their third paycheck toward their debt snowball. Hold on! This might not be the best thing to do with the extra money. If you do not have a buffer in your bank account so that you are cash flowing your budget right now, then your third paycheck this month should be left in your checking account. Use this money as a buffer so that you can cashflow your budget.
Starting with your February budget, you should be able to cash flow from there on out. Your third paycheck in January sits in your bank account and is used for expenses in February. You still create your February budget based on your February income and expenses. You will just be able to cashflow February no problem! At the end of February, you will still have a whole paycheck in your bank account. You are no longer living paycheck to paycheck! Each month after this is the same thing.
Applying the Third Paycheck to Your Current Baby Step
Once you are cash flowing your zero-based budget, the next time you have a three-paycheck month you apply the paycheck to the baby step you are on at that time. If you don’t have $1,000 saved, apply your third paycheck to your baby step 1 small emergency fund. If you are on baby step 2, then use the extra money to pay off your debt and apply the money to your smallest debt. When you are paying off your mortgage early, then use the money to pay off your house. Whichever step you are on, use the extra payment for that.
There are a couple of exceptions I would make to this, but these are not exceptions if you are budgeting correctly and being intentional with your money. If you are on top of things and have calculated how much total tax you owe for the year, you should already know by this point if you are going to owe additional tax when you file your return. This is why it’s really not an exception. If you are going to owe additional tax, then your third paycheck in January should be set aside for taxes. Don’t incur additional debt, especially debt to the IRS.
Another exception would be to save the money for upcoming, known expenses. If you know you will need a different vehicle in the next six months and don’t have enough saved yet, then add this money to your vehicle fund. If you are expecting a baby, then add this money to your baby fund. These, too, are not really exceptions, because this is just part of budgeting and being intentional with your money.
Stay the Course
A three-paycheck month is not the time to quit following your plan and randomly spend your money. You don’t build wealth like that. This isn’t free money. Don’t think you won the lottery each time you get a third paycheck in the month and go hog-wild on a shopping trip. Don’t think it’s time to go buy Bitcoin with it. You don’t take your third paycheck and think it’s time to go lease a vehicle, buy a timeshare, or go buy the latest iPhone just because you have extra money. Your plan doesn’t change when you receive additional money than what you need for your budget on a given month. If you get paid every other Friday, you should already be budgeting each month using only two paychecks each month, so getting three paychecks in a month doesn’t change anything. You continue with your financial plan.
The three-paycheck months seem like a big deal to us, but the fact of the matter is that you should already know where this money is going. You already know this money is coming, so it should already be planned for in the back of your mind since you have financial goals. It’s not like receiving an inheritance from a rich uncle that you didn’t know was coming. Even in a case like that, the same rules apply as when you get a third paycheck in a month: Make sure you can cashflow your budget, apply the money to your current baby step, and make sure you don’t use the money to derail your financial plan.