Having extra income deposited into your account always feels like reason to celebrate. And while you should treat yourself to something nice — within moderation — experts warn against being careless.
“That third paycheck is a rare and delightful surprise, but the last thing you want to do Is let it slip through your fingers on things that won’t benefit you in the long run,” said Jon Morgan, CEO of Venture Smarter. He says one pitfall is falling into the trap of unnecessary expenses, like a spontaneous weekend getaway or a shopping spree.
“While those can be tempting, try to resist the urge,” he said. Instead, he recommends using that extra cash strategically. “Maybe contribute a bit more to your retirement fund, start an investment account or tackle a nagging debt. It’s about making your money work for you, not the other way around.”
Here are more money mistakes you might make when you get that extra paycheck.
Using It as a ‘Bonus’ Instead of Budgeting It
One of the common missteps people make when they receive that third paycheck in a month is treating it as a windfall or “bonus,” said Ricardo Pina, finance expert and founder of The Modest Wallet.
“Instead of considering this extra influx of income as part of their typical budget, they view it as an opportunity for impulse purchases or extravagant expenses,” he noted. “This mindset can lead to financial strain in the long run, because it disregards the potential advantages of saving or investing that extra paycheck.” He says it’s important to remember that any income, regular or extra, should be managed prudently with proper budgeting.
Failing to adjust your monthly budget to accommodate the extra paycheck can cause financial imbalance, said Sherman Standberry, licensed CPA and managing partner at My CPA Coach. “You may end up overspending in one month and then struggle the next month when you’re back to two paychecks.”
Not Having a Plan for the Extra Income
Another mistake people make with that third paycheck is not having a specific plan in place for it, Pina observed. “Without a clear idea of how to allocate the additional funds, people may end up mindlessly spending it on non-essential items or simply letting it sit in their checking account without any purpose.” He said it’s necessary to have a plan for the extra income. “This will ensure that the third paycheck is put to good use and contributes to one’s overall financial well-being.”
Many individuals perceive the third paycheck as an unexpected windfall and succumb to the temptation of indulgent spending, said Jeff Mains, finance expert and CEO of Champion Leadership Group. But he warns that this impulsive behavior can hinder long-term financial goals.
To counteract this common error, Mains said it’s crucial to adopt a proactive approach to financial management. “Instead of viewing the third paycheck as discretionary income, consider allocating it strategically,” he said.
Establishing an emergency fund, contributing to retirement accounts or paying down high-interest debts are prudent actions — and are all ways of doing this, he noted. “This approach ensures that the additional income is invested in securing one’s financial future rather than being frittered away on short-term pleasures,” Mains added. “By fostering a mindset of financial discipline and foresight, individuals can transform what might be perceived as a financial bonus into a valuable tool for building wealth and achieving long-term financial stability.”
Ignoring Other Financial Priorities
“Sometimes, people may get carried away with the excitement of an extra paycheck and forget about other important financial priorities,” Pina warned, noting it’s crucial to keep in mind that even though that third paycheck may feel like a “bonus,” it shouldn’t be used as an excuse to neglect other financial responsibilities, like paying bills on time, contributing to retirement accounts or setting aside money for future expenses. “It’s important to strike a balance between enjoying the extra income and still staying on track with overall financial goals.”
Spending It Immediately
While it’s natural to feel giddy about an extra paycheck, it’s important to approach it with a strategic mindset. Dana Ronald, finance expert and CEO of Tax Crisis Institute, noted that while it may be tempting to splurge on something new or go out for a fancy dinner when you get that extra paycheck, you should resist the urge.
Experts recommend taking the opportunity to review and adjust your financial plan. Allocate the extra income strategically, considering your short-term and long-term financial goals.
“Use this money to pay off any outstanding debts or invest it in a savings account for future financial stability,” Ronald urged.
Forgetting About Taxes
If the extra paycheck pushes you into a higher tax bracket, Standberry says you could end up owing more taxes than you anticipated. It’s important to consider the tax implications and adjust your withholding if necessary.
“One of the silliest things I’ve observed is people tweaking their W-4 tax withholdings for their third paycheck to temporarily boost its amount,” said Thomas Franklin, finance expert and CEO of BitInvestor. “This move is not wise, and I strongly advise against it.”
“Let’s be clear: the IRS will collect their dues, regardless of any clever maneuvers you think you’re pulling off,” he said. “Altering your withholding status from single with no dependents to married with a bunch of dependents, just to inflate your third paycheck, is not fooling the IRS in any way.”
According to Franklin, what you’re doing is just setting yourself up for a larger tax bill next year. “Even worse is forgetting to switch your W-4 back to its original setting. This oversight could lead to owing the IRS a substantial sum, repayable on a plan with high interest rates,” he warned. “It’s a needless and unwise financial strategy.”
The bottom line, said Franklin, is to avoid the above altogether. “Just don’t do it. It brings no real benefits and only increases the risk of complications. You’re not going to outsmart the IRS. End of story.”
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