Save 8% of your Annual Income & The Two Paycheck Method

How would you like to save nearly 8% of your income a year without changing any of your behaviors on a monthly basis (except for filtering money into your savings account)?  The process sounds simple, and the process is simple.   All it takes is thinking about your paychecks differently.

Most people get paid bi-weekly.  For example, I have three jobs, and all of them pay me bi-weekly.  That means 26 pay checks per year, or 2.167 pay checks per month.  If your paychecks are like mine, it means that 10 months out of the year you are only going to receive two paychecks a month.  The other 2 months of the year you get three paychecks.  If you have been living 10 of 12 months on two paychecks, what should you be doing with the third paycheck that arrives on the other 2 months.  Save it!

Most people receive paychecks bi-weekly

Most people receive paychecks bi-weekly

Personally, I look at my finances as a monthly battle.  Net income vs. net spending.  The weapons for me in this battle are my paychecks.  If your monthly battles have the same outcome as mine, your net income beats your net spending consistently and you are an ideal candidate for adopting the two paycheck method.  That third paycheck is superfluous, and shouldn’t be necessary to maintain your current standard of living.

If you don’t absolutely need that money to survive, think of all the other things you can do without comprising your lifestyle.  You can siphon that money into an emergency fund, or you can pay off debt or put it towards other savings goals.

Another reason to plan on living off of 24 paychecks a year vs. 26 is the likelihood of changing jobs in your mid twenties.  According to the Bureau of Labor Statistics, the median job length for people with a bachelor’s degree between the age of 25 and 34 in 2008 was 2.6 years.  These statistics were before the US economy tanked last fall and several of our peers found themselves out of work.  When the data is recalculated later this year, it is likely that the 2.6 year median will have declined.

There is a tendency amongst young adults to job hop as they settle into the workforce.  You may find yourself without any income for several cumulative weeks over the next five years.  This may be the case even if you were never laid off. You could want to take a few weeks off before changing jobs or you may not have the opportunity to start a new job on your time frame.  This would be an ideal time to have those third paychecks waiting for you to use to make sure your bills are paid for the month.

Try this method for two years, and you will have  four paychecks saved.  Think of what you can do with four paychecks.  A trip to Europe for two weeks with money left over sounds like a possibility, even on a 40K a year salary.

One Response to Save 8% of your Annual Income & The Two Paycheck Method
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