How How to to Handle Handle Biweekly Biweekly Pieces Pieces in in aa Monthly Monthly Budget Budget
When you look at budgeting, almost everyone will tell you to create a monthly budget. This is because so much of your financial life is monthly based. However, not everything works that way. For many reasons, there are likely to be elements of your budget which occur at a weekly or biweekly level. Usually, this is a good thing, providing you handle them correctly.
Biweekly Budget Elements Much of the budget is based on a monthly time frame. For example, utility bills, food purchases, insurance premiums, and credit card statements are just some of the budget elements that happen on a monthly basis. However, there are some elements of the budget that can happen every two weeks. The most common biweekly element is your paycheck; according to my research, about 50% of companies pay their employees biweekly, and there are many who pay their employees weekly, which needs to be handled the same way. You can set up major payment plans on a biweekly basis as well, especially your mortgage and your car payments.
What is the Issue? The issue with a biweekly element is that a month is, 11 out of 12 times, not four weeks long. There are those few extra days in the month. When those extra days are accumulated, you have a 13th month, which confuses many people. To look at this another way, if you divide the year into biweekly periods, you have 26 periods. If you work with two periods a month, that is 13 months, but there are only 12 months in the years. The two extra periods occur approximately 6 months apart.
Impact of Biweekly Payments If your loan is a simple interest loan, like a car loan, these extra payments don't have any real impact on your overall situation. However, if you have a compounding interest loan, such as a mortgage, making the extra payments can have a profound impact. Not only are you paying an extra month each year, but you are also saving the interest on the principle of that extra payment. In effect, this will shorten a 30-year mortgage not by 2 years but by over 5 years. As a side note, you can save even more if you can make that extra monthly payment at the beginning of each year, but this technique does not have the advantage of occurring automatically.
Integrating the Biweekly Elements into Your Budget First, you could calculate the yearly totals and then divide by the 12 months to see what each month looks like. While this does convert the biweekly elements to monthly elements, there are two drawbacks. On the one hand, this can be lead to somewhat complicated calculations, and we are constantly trying to simplify things. On the other hand, you would have to carry the extra elements over the six months, distributing them evenly until the next 3 period month. This is sometimes impossible to do, and is always a serious pain in the neck. Second, you could create two budgets, one for the 10 months of two periods and one for the 2 months of 3 periods. This also is both complicated and difficult to mange, for now you have to remember which month is which. Third, and the one I recommend to my clients, is to ignore the extra periods where possible. If you get paid every two weeks and you have a biweekly payment, say on a car loan, then these naturally match up. However, in terms of your monthly budget, every month, all 12, are considered to have only two periods. This simplifies your budget immensely, allowing you to predict each month. The extra paycheck, or what is left after your deductions and biweekly payments, is treated as a windfall; in particular, it should be saved and invested as much as possible, although it can also be used to handle emergencies, like car repairs.
Sources: https://halfapayment.com/half-a-payment-about.php http://ezinearticles.com/?How-to-Handle-Biweekly-Pieces-in-a-Monthly-Budget&id=2875657 wikipedia.org