Are you having trouble saving money? Do you get to the end of the month and realize you’ve spent everything you earned? In this post, I’ll show you how you can virtually guarantee that you save at least 7% of your annual take home pay. Rachael and I first discovered this strategy on the way back from our honeymoon. (yes, we’re big nerds and we had been excited to work on our married life budget since we got engaged – now leave us alone!)
So, we’re on the plane, coming back from Playa del Carmen, Mexico, and we started mapping everything out. We knew we wanted to save aggressively because Rachael still had some law school debt to pay off, but we also had some things we wanted to do for fun, such as traveling.
As we got started, the first task was to figure out our annual take home pay. In order to do that, we needed to know the number on our paychecks so we could multiply. Rachael gets paid bi-weekly, and I get paid weekly. So, we started to take those numbers and multiply. Rachael’s paycheck times 26 and mine times 52. As we started to do this, we realized that we wanted to get this down to a monthly budget. We we took the annual number we arrived at and divided it by twelve months in a year.
The Problem with Dividing Your Annual Take Home Pay by 12
However, we recognized that this wasn’t ideal because some months (4 to be exact), I received 5 paychecks, and the remaining months I received 4. The same went for Rachael. Some months she received 3 paychecks, but the remaining months, she received 2 paychecks. Don’t believe me? Just look at the calendar for this year. If you get paid every Thursday, like I do, you’ll notice some months have 5 Thursdays, while the rest have 4.
This became problematic because we had taken an annual number and divided it by 12, which mean that some months we wouldn’t have enough money for our budget, even though it would all work out at the end of the year. Let me show you an example.
Let’s say you get paid $45,000 per year and receive weekly paychecks. For the sake of simple math, I’m not going to remove taxes. But, in order to get a workable take home number you will have to take out taxes. If you take $45,000 and divide it by 52 weeks, you get about $865 per paycheck. And if you take $45,000 per year and divide it by 12 months, you get $3,750, or the amount you can use to budget for your savings and expenses. If you get paid 4 times in one month, you’ll receive $3,460. If it’s a 5 week month, you’ll receive $4,325. However, at the end of the year, it all balances out to $3,750.
That becomes a problem in January when there are 4 paychecks and you receive $3,460, but have a monthly budget of $3,750. Now you’re $290 in the hole. Now that may not seem like a big deal. Maybe you have it in savings, so you can cover it until it all evens out. However, we’ve found that it’s not a good practice to spend money you don’t have or take money from deep savings and spend it before you’ve “earned it”. What if you lost your job the first week of February? You’d have taken money from deep savings. Hopefully, you see the problem here.
Finding Hidden Money in Your Annual Salary
Now, let me show you how to get your “secret money”!
- $45,000 per year
- $3,750 per month
- $865 per week
Build your monthly budget around the 4 paycheck months. If you do that, you’ll have a monthly budget of $3,460 ($865 x 4). Then, when the 5 week paycheck months come around, you’ll have an extra $865 that can go right into savings because you didn’t even plan for it. (well, secretly you did!)
By saving the $865, 4 times per year, you’ll save $3,460, or 7.6% of your annual salary! Also, I’m assuming you’re allocating some of the $3,460 towards savings as well, so you should easily be over 10%, which is a great start!
You can follow this same logic for bi-weekly paychecks as well. Create your monthly budget around your bi-weekly paycheck times 2. Then, in those 2 months that you receive 3 paychecks, stuff it into savings! If you get paid monthly, that makes this strategy a little trickier, so I would just recommend budgeting off 11 months instead of 12. This will be you slightly above 8% savings, which is even better.
What do you think of this strategy? Is this how you create your monthly budget? Leave a comment below – we’d love to hear from you.
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