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What to do with an extra paycheck

By Paula Pant ·
Tuesday, August 13, 2013
Posted: 1 pm ET

Do you get paid biweekly? If so, you're getting three paychecks during the month of August.

There are five Fridays during the month of August, and if you get a biweekly check, chances are strong that you'll be paid on three of these Fridays.

If you're in the habit of budgeting based on receiving two checks per month, that's great news. It means that you effectively get an "extra" paycheck -- one you weren't accounting for within your budget.

This presents an excellent opportunity to save some money. After all, you haven't planned for this mini-windfall. What should you do with your "extra" August paycheck?

Pay down debt or save for retirement

Paying down debt needs no explanation. If you carry high-interest debt (such as a credit card balance), use your entire extra paycheck to pay down the balance.

If your debts are paid off -- or if you simply find them manageable for now -- the extra paycheck presents a great opportunity to stash away some extra money for retirement.

Invest in either a traditional individual retirement account or a Roth IRA. Investing in a traditional IRA will save you money on taxes this year.

Contributions to a Roth IRA are tax-exempt, which means you'll pay income taxes on the earnings this year, but you won't pay a penny in taxes when you withdraw the money -- not even on capital gains or dividends.

Enhance your emergency fund

What will you do if the roof starts leaking, you lose your job, or your doctor sends you a $4,000 medical bill?

Prepare for these financial calamities by enhancing your emergency fund, a savings stash you vow not to touch unless disaster strikes. Experts advise saving between three to six months' of living expenses in your emergency fund.

If you want extra security, or if you work in an industry or job market that's a little shaky, consider setting aside as much as eight to 12 months' of living expenses.

Save for big-ticket items

Eventually, you'll want to replace your car, buy a dishwasher or take your kids to Disney World. Why not open a savings account that's specifically designated for one of these big-ticket items?

Online banks such as Capital One 360 and SmartyPig allow you to create "subaccounts" earmarked for individual goals. So, you can label your savings "Dishwasher Fund" or "Buying My Next Car in Cash Fund."

Paula Pant blogs at about building wealth and living life on your own terms. She's traveled to nearly 30 countries, owns six rental units that produce thousands in passive income, and runs her own digital marketing company. Follow Paula on Twitter @AffordAnything.

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1 Comment
Latoya @ Sisters’ With Bank
September 05, 2013 at 7:38 pm

I'm glad I ran across this article before those three paychecks come in November. I will definitely be paying off a credit card with that one. Thank you!