My employer pays me every other week, which means I receive 26 paychecks every year. This means that two months out of every year contain three paydays, and this month is one of them.
For a while I've been trying to decide what to do with my "extra" paycheck this month. I was very tempted to toss the whole thing into my Forex account and buy myself a decent monthly raise (passive income, I mean), but that might cause a problem due to the way I budget for many expenses: I put half of the total of my fixed expenses into a high yield savings account every time I get paid, then withdraw the funds when needed to pay those expenses. My mortgage is one of those fixed expenses.
The problem is that the money going into the savings account has to at least match the amount that needs to come out to pay these expenses each month, obviously. They all fall on different dates, and because of that I can't simply take check #3 this month and pitch it into my Forex account - the following two September pay periods straddle a couple monthly expenses that I would then not be able to meet because of the "missing" contribution from the last August check, and then there would be several months of disruptions before the system would regain equilibrium. Not fun.
While driving home from work this afternoon, I had Clark Howard's radio show tuned in, and he mentioned something that settled this question for me. He began by saying that he had received numerous emails and calls about something people were seeing in their mail: mortgage acceleration service offers. He led into the segment by saying "this isn't a scam, but it is a rip-off."
Basically, these "services" just set up autodrafts against your checking account every other week for half of the amount of your monthly mortgage payment. Since you end up making 26 payments each calendar year doing this, you end up paying an extra month's worth of mortgage payments against your principal. These companies are only doing something you can do on your own, but they charge you for it. Ridiculous!
So I figured Clark would say something like, "just set aside half of the mortgage payment out of each of your 'extra' paychecks, earn interest on the money, and make the extra mortgage payment once each year." Instead, Clark suggested dividing your mortgage payment by 12 and then adding this amount to your mortgage payment every month.
I realized right away that this was the answer for me! On my next mortgage payment I will add one-twelfth of the amount to it and direct that payment toward principal. Since I will have put half of my normal mortgage payment out of my "extra" paycheck into my high yield savings, this will come back out again in six installments and pay down my mortgage faster, earning me some more interest along the way. Best of all, I don't have to try and figure out how to juggle the paychecks that follow as I negotiate different due dates.
No budget disruptions, more home equity, and a little more interest income. Sweet! Thanks, Clark!
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