The 28-Day Budget on a Weekly Pay Schedule
By Christian Messemer, The Stewardship Shepherd
Last week I introduced the 28-Day Budget. There, I suggested that by cramming one month’s worth of expenses into twenty-eight days of pay, over the course of one year, it was possible to free-up two paychecks. The example used was a bi-weekly pay cycle, which is the most common method by which employers pay employees. With a bi-weekly pay structure, you could pay for one year’s worth of expenses using only twenty-four of the twenty-six received checks. This strategy would leave users with two paychecks that I categorized as FREE. Now, if you like the idea behind the 28-Day Budget, but your employer pays employees weekly, you are in luck. This strategy works for you too. Even better, weekly paid employees have more flexibility to decide when they structure the receipt of their FREE checks, than those of us paid bi-weekly. In what follows, I will discuss how the weekly paycheck works with the 28-Day Budget and the two options you have for structuring the receipt of your FREE checks.
There are fifty-two paychecks for the weekly paid employee. Using the 28-Day Budget, you will use forty-eight of them to pay for a year’s worth of expenses. This results in four FREE checks available to reallocate to your specific goals. Depending on how you structure your budget, you have two options for when you choose to receive those FREE checks.
Two FREE Check Options
The weekly paid employee has the option of receiving either two back-to-back checks every six months, or one check each quarter. Option One is similar in structure to the example given for the bi-weekly employee. The first paycheck used to fund the Month One budget comes on December 20th. Like the bi-weekly structure, the two FREE checks come during the same period (January 17th through January 30th). The second set of FREE checks come exactly six-months later.
Option Two’s structure differs from Option One in that the paycheck used to fund the Month One budget begins one week later, on December 27th. The one-week delay shifts the timing of your FREE checks from two every six-months to one check every quarter.
Is There a Best Option?
The question most people ask is, “Which option should I choose?” While I’m a firm believer that each person should choose the option that best fits their needs, as a finance guy, I believe there is a preferred option.
If I received a weekly check, I would structure the receipt of my FREE checks after Option One. I base this decision on my understanding of the Time Value of Money (TVM). TVM states that a dollar today is worth more than one dollar one year from now, or, in the above budget, three months later. So, when you have the opportunity to receive money now, or at some future point, you should choose the earlier option. Let me explain why.
In the following example, let’s assume that I’m using my weekly FREE check totaling $1,000 to pay down my credit card debt totaling $2,000
By using Option One, I use two FREE January checks, totaling $2,000, to pay off my entire balance. If I chose Option Two, I would only pay down $1,000 (one check) in January. I would then have to wait until April (three months later) before I had funds available to pay down another $1,000. Between January and April, the $1,000 balance would accrue $61 in interest. When I finally received my second FREE check, I would no longer be paying off a $1,000 balance, but paying down a $1,061 balance. The accrued interest of $61 means I would have lost $61 by taking Option Two, making Option One the clear winner.
Option One is not just the better option for retiring debt. The TVM principle also applies to saving and investment. While three months may not seem like it could make a large impact on your financial life, remember that debt-reduction or saving/investment do not just take place twice per year, but twice per year over ten, twenty, or thirty years. Over time, those numbers can make a significant difference.
Thirty-four percent of Americans receive a paycheck weekly. If you are one of these employees and want to implement the 28-Day Budget, you too can make the shift. Of the fifty-two checks that you receive throughout the course of the year, forty-eight will be used for yearly expenses. This leaves four FREE checks. Weekly paid employees have two ways in which to structure the timing of their free checks but mimicking the structure of the bi-weekly employee makes the most financial sense due to the Time Value of Money (TVM). Receiving funds earlier allows you to use those resources earlier and either reduce interest (pay down debt) or accrue interest (increase savings and investment).