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By Sandra Fry
Do you live paycheque to paycheque? For those who get paid biweekly, March might be a month when you get an “extra” paycheque. For many, the extra pay this month simply helps end the month in the black, and the cash is soon spent. But as a credit counsellor, I like to point out what a difference this bonus cheque can make in a client’s quest to get on top of their budget.
Here’s why March 2023 could be your month to make the changes you’ve always wanted to make to your spending, budgeting and overall money management system.
Most of us have an idea about which bills need to get paid every time we get a paycheque. Even without a formal budget or paycheque plan, we tend to divvy up our expenses throughout the month. If we have two big payments, such as a car loan and rent, we use the first paycheque to pay our car loan and the second goes to rent so that it’s not late. Utility bills, credit cards and other expenses get paid when there’s enough money left over to do that.
But what happens when there’s extra money? That’s when a budget is even more important than normal. Without a budget, we don’t know where we stand. Do we spend the extra cash on a splurge, pay a bill off entirely, save for an expense that comes up once a year, or just leave it in our bank account in case we need it? There’s no right or wrong answer, but depending on your goals and financial situation, some ideas for the extra cash will work out better for you in the long run than others.
If you’re managing all your bills and expenses well, consider using the extra paycheque to pay one bill off completely. If you don’t have a bill that you can pay off entirely, pay your smallest bill down as much as possible. Psychologically, it can be extremely motivating to knock one bill off your list and redirect the payment money to another bill. This is called the snowball method and it’s one of the fastest ways to get debt paid down fast.
Credit card fees
If you’re struggling and having trouble managing your obligations, an extra paycheque could get you out of a difficult spot with one of your bills. You could ask your credit-card company to reduce your interest rate or waive a fee if you make a significant payment by a specific time. If you’re behind on your electricity bill and face disconnection, an extra payment might save you that added trouble and expense. If you’re behind on your rent or fees for child care, the extra money might be just what you need.
However, before you decide where to use it, outline all your obligations to determine where an extra bit of cash can help you the most.
An extra paycheque is also a great way to jumpstart a savings account. Whether it’s for gifts, an annual vacation, new glasses or your emergency fund, it gets easier to add to a savings account when there’s already a solid start on deposit.
If you pay your mortgage semi-monthly, that comes to 24 payments each year. However, if you receive your paycheques biweekly and make your mortgage payments biweekly as well, that comes to 26 payments each year. While you won’t have as much “extra” money available in a three-paycheque month, you will save time and interest on your mortgage. It’s one way of accelerating your payments to pay your home off faster. Speak with your mortgage lender if you’d like to learn more about how to accelerate your payments.
You can also accelerate your payments on credit cards, lines of credit, overdrafts and some loans. An extra payment a few times a year, or dropping half of your tax refund down on a debt, means you pay less interest in the long run. With interest rates as high as they are right now, any savings you can find just makes it that much easier to pay off what you owe.
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Finally, look for ways to achieve your goals. Maybe you need to catch up on some home maintenance or car repairs. If you’ve never had the money to open a tax-free savings account, now you might. Topping up your registered retirement savings plan (RRSP) could help get you an income tax refund next year, which you could reinvest into your RRSP again. Many Canadians use this strategy to ensure they aren’t hit with a surprise income tax bill, but also to keep investing in their RRSP when their budget is tight.
If March isn’t your month to break the cycle of living paycheque to paycheque, June might be. If you file your taxes on time, you’ll hopefully have your refund by then, too. Combine any refund you get with the extra paycheque, and you could have a sizable sum to get back on track and give yourself a clean financial slate.
Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 26 years.
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