Strategies for maximizing your income using a single month's salary
In Canada, receiving an extra paycheck every now and then can be a welcome surprise. Financial advisors recommend using this additional income strategically to improve one's financial health.
Common recommendations include building or boosting emergency savings, paying down high-interest debt, increasing contributions to registered savings plans such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), and investing for long-term goals. Some advisors even suggest automating savings by setting up direct transfers into a savings or investment account.
While specific advice for managing an extra paycheck for Canadians paid bi-weekly isn't always explicitly detailed, the principles for managing windfalls or extra income generally apply. These principles are aligned with advice from Canadian financial institutions and advisors who emphasize paying down debt, building savings, and investing wisely.
It's important to consider one's overall financial goals and current situation when deciding what to do with the extra paycheck. Consulting a financial advisor can provide personalized guidance.
Sara McCullough, a financial advisor, categorizes the extra money into one of four areas: catch-up, future bill reserve, wiggle room, and future. The extra paycheck could be used to catch up on credit card bills or line of credit payments, provide wiggle room in the budget, or serve as an emergency fund. It could also be used for future plans or investments.
For those struggling to make ends meet but saving for a down payment, the extra paycheck could be a valuable opportunity. Christine White, another financial advisor, often advises her clients to divide the extra paycheck among several goals: one third for debts, one third for leisure, and one third for investing.
However, it's not always necessary to tie the extra paycheck to financial goals and debts. If someone has liquidity reserves, the extra paycheck can help them get ahead. Ms. White suggests having a plan for the extra paycheck before it hits the bank account.
Canadians who are paid bi-weekly receive three paychecks during two months of the year. If a person's first paycheck was received on January 3, the months of January and August will be their three-paycheck months. If a person's first paycheck was received on January 10, they'll receive three paychecks in May and October.
Lastly, comes the "you for tomorrow" category, according to Ms. McCullough. This could be an opportunity to build an emergency fund or replenish funds set aside for home repairs, vacations, or a new vehicle. The ideal time to get ahead is when there are no high-interest debts and other months are going smoothly.
- Sara McCullough, a financial advisor, recommends using an extra paycheck strategically to improve personal-finance, by categorizing it into four areas: catch-up, future bill reserve, wiggle room in the budget, and future investments in long-term goals.
- Financial advisors like Christine White suggest Canadians paid bi-weekly, who have liquidity reserves, to use their extra paycheck to get ahead, planning for it before it hits the bank account, as it might provide an opportunity to build an emergency fund or replenish funds for other future needs such as home repairs, vacations, or a new vehicle.
