Would You Accept A Salary Advance?
In the world that we live in most employers offer one of two options for receiving your pay. The Bi-Monthly paycheck, paid out on the 1st and the 15th of every month thus allowing 24 paychecks or the Bi-Weekly paycheck which results in getting paid every 2 weeks for 26 paychecks throughout the year regardless if you are hourly or salary. Up until a few days ago I was part of the Bi-Monthly pay period and 24 paychecks and now as of 2015, 26 paychecks is my new way of life.. The big change for me is the first check in the New Year, I will only receive pay for 7 days instead of the usual 10-11 days within the Bi-Monthly period. To help employees ease into the change, the company is offering an advance on my salary. Free Money Right?!?! So would you accept a salary advance?
BORING NUMBERS BELOW FUN CRAZY IDEAS AT THE BOTTOM
If you are like me you need some numbers to get your brain working. Let’s say your gross salary is $3,000 your new Bi-Weekly(26 paychecks should be $3,000 (78,000/26 weeks)and no way am I getting into taxes on this. . Because this is the first time your company uses this plan your first paycheck will be for the first two weeks of the year January 1st – January 9th , only 7 working days which amounts to the first paycheck being $2,100. Going from 3k to 2k right after the holidays is probably a big hit for most people, who are living paycheck to paycheck. That’s $900 that we will not be getting until July when we will receive 3 paychecks, that and to go along with a slighter lower paycheck each time is certainly a tough change. In our scenario after the first big decrease the remaining of the paycheck will be an adjustment of $250 less each paycheck than your normal bi-monthly check. ($3,250 with a Bi-Monthly, 24 paychecks). Scary right?
Since the change affects so many people and comes right after a time when people are spending extra money on Christmas presents, travel to see family, and popping bottles of champagne on New Year’s, they decided to offer a Salary Advance. Here was my initial reactions:
I don’t need a salary advance, I have my money budgeted. I don’t live paycheck to paycheck. I’m going to have to pay the money back anyways, I’m not doing that. They probably charge you a bunch of interest and fees, nice try, but no thanks.
Here’s a brief summary of the company offer:
If you choose to have a salary advance you will receive 3 days worth of pay on your first paycheck in January, you will be expected to pay this amount back over the next 25 paychecks, there will be no fees or interest charges, but if you should leave the company the full amount will be due from your last check.
Here is your choice from our example above, do you want $900 now or do you want $36($900/25 Remaining Weeks) less in each paycheck this year? I started explaining it multiple ways to myself like do you want $900 now or $36 every 2 weeks for a year? Would you want a year’s salary upfront or paid out over the course of the year? This idea got me thinking this would be the greatest thing in the world for the employee and the worst thing in the world for every company out there. Yes sir I want the entire salary mentioned above of $78,000, think of all the things you would be able to do with that and how you would live your financial life differently. I wouldn’t worry about paying off my debt in April, I’d pay it off Today, Booyah!(Rest In Peace Stuart Scott) 401K, HSA, IRA, all done, Booyah! Budgeting would literally be the most important thing in the personal finance world, I mean it is, but this would blow it up, I think every single person in the U.S. would be required to take a Budgeting class, because the downfalls of not budgeting your money would send everyone into a tail spin. I can see the stories and headlines now:
Man Buys New Mercedes, Prefers Car over Food! Women Dressed For Success with $30,000 New Wardrobe, Fired Week Later, Now on Scavenger Hunt for Receipts! Couple Puts Paycheck on Red, Soon Finds Out, So Are They!
I could go on forever on this one, but let’s get back to the real life example for a minute. So $900 now or $36 every paycheck. I am in the NOW. I want to pay off my student loans and any extra money coming in is going to be great, because remember I’m sacrificing my a$$ off right now to pay them off by April. It’s very similar to an annuity option that you may have closer to retirement, do you want your lump sum payment or your monthly annuity? Which really depends on what interest rate you are receiving over that time and if you are able to do better. In my case I am paying off my student loan which is at around 4% interest, this would result in approximately $36.67 in interest over 1 year, I used this compounding calculator to figure this out. The end result is I’m going to save money by taking a salary advance. While not saving tons of money, I am still saving some money by taking a salary advancement.
While my option was to have 3 days of my salary advanced to me, let’s make this more fun and answer these questions.
What would you do with a 1 year Lump Sum Payment from your Employer/Self Employer? Would you be able to handle the pressure of handling your budget for the year and the consequences if you didn’t? What would your headline read, would it read like mine?
Even Steven pays of Student Loans, Maxes Out Retirement, and Eats Only Ramen Noodles in December!