Pay periods matter

November 19, 2013 at 11:17 pm Leave a comment

Recently, I got some troubling news.  Starting early next year, my job is moving from a monthly pay schedule to a bi-weekly pay schedule.

From what I’ve been told, most people seem to think “Great!  That means I’ll have more money!”

Apparently, these people can’t do math.  Changing your pay period from once per month to every two weeks does not increase your pay.  Your salary is exactly the same, but it can cause you to actually have less money available most calendar months.

Think about it.  Instead of getting 12 checks, once per month, this is bi-weekly.  So, 52 weeks / 2 = 26 pay checks per year.

Here’s an example so we can see what this does to your salary:

Let’s say you make $50,000 per year.  For simplicity, we will use gross, not net.

50K works out to a monthly salary of 4166.67.
If paid bi-weekly, that’s 1923.07 each check.

Here’s where the fun starts…  This year, 10 months will have 2 pay periods in them, and 2 months will have 3 pay periods.

For each of those 10 months with only 2 pay periods, you would end up with 3846.14 to live off of those months.  That’s $320.53 less each of those 10 months than if you were paid by a monthly salary.  That 7.7% of your monthly salary that you won’t see until one of those two months with 3 pay periods.

If you are already tight on money, this shift of 7.7% of your monthly income to other months will make things even tighter.

I’m not sure what benefits the business gets from making this change, except that perhaps it aligns better with the business cycle, so cash flow may be smoother throughout the year.  Being that our company is now owned by a venture capitalist company, there’s almost certainly a dollars and cents reason for this move.

Ultimately, if you are budgeting your income and you are aware of what this does to you BEFORE it starts happening, this isn’t a huge problem.  If you aren’t aware, however, it can be a rather shocking thing to discover.

 

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