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July is a 3-paycheck month for some — Here are 3 'smart' ways to make that extra check count, according to a CFP

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Key Points
  • If you get paid biweekly as a W-2 employee, typically there are two months out of the year when you get paid three times.
  • If your first paycheck of the year was on January 14, your three-paycheck months are July and December.
  • If your first paycheck of the year was on January 7, your three-paycheck months would have been this past April and this upcoming September.

If you get paid biweekly as a W-2 employee, typically there are two months out of the year when you get paid thrice. For some lucky workers, July 2022 is the first one this year.

Your three-paycheck months will depend on your pay schedule. If you look back at your pay statements from January and your first paycheck in 2022 was scheduled for Friday, January 7, your three-paycheck months would have been this past April and this upcoming September. But if your first check of the year was on Friday, January 14, your three-paycheck months are July and December.

More frequent paychecks can lead to overspending, according to a new study published in the Journal of Consumer Research. Those who get paid more frequently spend more because they perceive themselves to be wealthier, the study found. If a person who typically gets paid once a month starts getting paid every weekday they will spend about $250 more dollars that year.

Instead, there are "smart ways" you can use that extra paycheck to help you achieve more financial security, says Carolyn McClanahan, a CFP and the founder of Life Planning Partners in Jacksonville, Florida.

Here are three of the best ways to make that extra paycheck count, in order of importance, according to McClanahan.

1. Pay off high-interest debt

"The number one thing you should do with any extra paycheck is pay down high-interest debt," McClanahan says.

As the Federal Reserve hikes interest rates in an effort to curb inflation, credit cards, which are especially sensitive to rate hits, are seeing rates increase. The average annual percentage rate on a new credit card is currently more than 20%, according to LendingTree's tracker. "Paying an interest rate that high on a credit card can really harm your finances," she says.

The best approach is to start by paying off the debt with the highest interest rate so you can save the most money possible over the long term, McClanahan says.

2. Contribute to an emergency savings account

After you've paid off interest-bearing debt, the second smart thing you can do with extra cash is build an emergency savings account, McClanahan says. Just 44% of people are prepared to pay for an unexpected $1,000 expense with cash. More than one-third of people would need to borrow the funds, according to a Bankrate poll.

The number one thing you should do with any extra paycheck is pay down high-interest debt.
Carolyn McClanahan
CFP

While some experts recommend setting aside as much as 6-months worth of expenses, McClanahan says it "depends on how secure your job is. If you have a lot of job security, save three months [worth of expenses] instead of six."

3. Contribute to a Roth IRA

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What is the difference between Roth and traditional IRAs

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If you meet the income qualifications, opening a Roth IRA is one of "the best ways to save for your future," McClanahan says.

Roth IRAs are funded with money you've already paid tax on. So you won't get an upfront deduction, but your contributions grow tax-free. Once you turn 59½, provided you've owned the account for five years, you can withdraw money from the account tax-free. With a Roth IRA, you can also withdraw up to the amount you've contributed any time without paying a penalty.

This content is for informational purposes only and is not intended as investment advice. The strategies and investments discussed may not be suitable for all investors.  Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions.

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