The Secret Budget Sauce: Your Automatic Hidden Bonus

The Secret Budget Sauce: Your Automatic Hidden Bonus

A chef figurine shown sampling sauce, illustrating how an automatic hidden bonus can serve as your secret budget sauce.
Photo by Alexas_Fotos, CC0 1.0 license

Culinary sauces are the foodie’s spice of life. Whether in the form of a homemade cranberry sauce, a mouth-watering BBQ glaze, or some pain-inflicting fire juice, every King or Queen of the Kitchen has a secret concoction that only they can make. A sauce that transforms a simple dish into something people talk about for days.

If you’ve been following this Master Your Money series from the beginning, you’ve been busy whipping up your own custom money management system. And perhaps without even realizing it, you may have created an automatic hidden bonus for yourself in the process.

We’re not talking mere chump change, but nearly 10% of your annual income. So prepare to savor the results of your hard work, because it’s time to take a look at this secret sauce that can transform your budget into something truly special.

Your Kitchen Prep: A Balanced Monthly Budget

No cook worth their salt starts concocting a recipe without performing the required kitchen prep first. So before we get into the recipe for your secret budget sauce, let’s review the prep work required to prepare it successfully.

If you’ve been following the Master Your Money series from the beginning, you’ve positioned yourself to win with money by creating budgets within each of the four categories below:

  1. Income
  2. Bills & Non-Discretionary Spending
  3. Savings Goals
  4. Discretionary Spending

You measured out the amount of each component budget line item within these four categories on a monthly basis. This concept may seem pretty simple and straight-forward at a glance. But it constitutes essential prep for your automatic hidden bonus.

The Primary Ingredient: Your Budgeted Income

Back when you first started your kitchen prep, you did so by creating a monthly budget for your income. But take a close look at the specific instructions you used to set your monthly budget:

  1. Multiply net wage income by four if paid weekly.
  2. Multiply net wage income by two if paid every two weeks.
  3. No multiplication is required if paid monthly.

These instructions are the magic ingredient in the secret budget sauce which you may have inadvertently created.

The Secret Budget Sauce Recipe

If you get paid weekly or bi-weekly and followed the above instructions, your monthly budget for income is based on receiving either four (weekly) or 2 (bi-weekly) paychecks per month.

But four weeks per month x twelve months = only 48 weeks per year. We know there’s actually 52 weeks per year. So what gives?

The missing four weeks exist in the form of the 29th, 30th, and 31st days contained in various months throughout the year. All months other than February always contain at least 30 and as many as 31 days per year. These months therefore each contain 2-3 days beyond the first 28.

The end result? Four months every year contain the same calendar day 5x rather than 4x. This means you’ll receive an extra paycheck 4x per year if you’re paid weekly, and 2x per year if you’re paid bi-weekly, no matter which day of the week you’re paid on!

Don’t believe me? Take a look at the 2018 calendar and count your paydays by week in each month. If you get paid weekly on Friday, the months you’ll receive an extra paycheck for 2018 are March, June, August, and November. If you get paid bi-weekly, you will receive extra paychecks in March and August of 2018.

For a longer look into the future, check out this list of months containing extra Fridays.

The Numbers Behind Your Automatic Hidden Bonus

You might dig the thought of an extra paycheck per month now and again. Who wouldn’t? But this is an even bigger deal than you might otherwise believe.

Why? Because all of the budgeted outflows from your checking account are fixed amounts per month which do not vary. Your electric bill doesn’t suddenly go up just because there happens to be five Fridays in a given month.

All of your monthly expenses and savings goals are already fully funded with your normal income. This means 100% of that additional paycheck is yours to keep! These extra paychecks simply boost your monthly net profit through the roof when received. Use this extra cash for discretionary spending or savings goals, the choice is yours!

So let’s talk some numbers. No matter whether you get paid weekly or bi-weekly, your monthly bonuses of unallocated income add up over the course of a year to 8% of your annual take-home pay.

If you are paid weekly, a fifth paycheck represents an automatic 25% bonus to your typical monthly income. How often will you receive this bonus? Four months or 33% of every year!

If you’re paid bi-weekly, you’ll receive an even larger 50% automatic bonus to your monthly income. But you will receive it only two months or 16.7% of every year.

Whether 25% or 50%, this automatic bonus to your typical monthly income is 100% real.

And It. Is. AWESOME.

The Psychological Boost Of Bonus Months

Mrs. FFP and I have always referred to these months containing additional paychecks as “bonus months”. And we always looked forward to them with great anticipation.

Why? Think about it. Do you get pumped when your tax refund arrives? Jazzed about Christmas morning gifts? Psyched for your birthday? Think of how each of these special days make you feel each year. Then pick out which one you get most excited for, and imagine it happening an additional 2-4x per year.

As many as FIVE tax refunds each year. FIVE Christmas mornings. FIVE birthdays.

Catching the bonus month craze yet?

Uses For Your Automatic Hidden Bonus

So what do you do with these bonus paychecks when they arrive? In the same way that no arbitrary budgeting formula will work for everyone, there is no one-size-fits all answer to this question.

Mrs. FFP and I typically employed the concept of being selfish with ourselves to save 80%, give away 10%, and treat ourselves with the remaining 10%. But that was just what worked for us.

You could spend it all on your favorite splurges. Save it all on behalf of your future self. Split it 50-50 between the two. You earned it, so you decide. You’ll have to find the right balance on the save vs. spend tightrope for yourself.

To get your juices flowing, below you’ll find two short lists of five ways you could either save or spend your bonus paychecks.

Five Savings Ideas

If you want to both treat yourself and save at the same time, here are five possibilities:

  1. Permanently end the stress of your unexpected bill scramble drill by funding your new sinking fund savings accounts with a one-time lump sum to make up for the months that have passed between the due date of the last bill each account represents and the date you began making monthly contributions.
  2. Stop living paycheck-to-paycheck and simplify your monthly cash flow choreography by saving up an entire month’s worth of expenses in your checking account.
  3. Beat Murphy’s Law by building or replenishing your emergency fund until it is fully-funded.
  4. Give yourself a raise on top of your bonus by putting your extra paycheck to work mining your debt with an extra payment. Doing so will reclaim your income lost to debt service more quickly and reduce the interest penalty you’ll pay overall.
  5. Speed up your financial freedom by saving towards the other goals on your financial freedom shopping list.

Five Discretionary Spending Ideas

If you’ve already given yourself the major gifts of the first 3-4 points on the above list, consider using your bonus paychecks for the below:

  1. Make Christmas gift-giving or a vacation possible by depositing your bonus into dedicated sinking funds if your usual monthly budget doesn’t already include them. If your budget includes sinking fund contributions for these already, guarantee you can afford them by eliminating the first-year shortfall caused by the months that have passed between the last expense and the date you first began making monthly sinking fund contributions.
  2. Fund home improvement projects or purchase furnishings which may not be in your usual monthly budget.
  3. Share the joy by generously giving a portion of your bonus to someone in need or to a worthy cause.
  4. Invest in your relationship with your spouse or significant other (if you have one) by treating them to their favorite restaurant or event.
  5. Reward yourself for your budgeting savvy and splurge on your favorite hobby.

Why Call It The Secret Budget Sauce?

So why refer to this concept of bonus months as “the secret budget sauce”? Quite simply, because I think it’s a perfect analogy for the effect it can have on your budget.

The typical sauce elevates a mundane dish by transforming it into something truly special. In a similar way, bonus months make your budget truly special by capitalizing on the concepts of delayed gratification and paying yourself first to deliver an automatic hidden bonus 2-4x per year that can rival the joy of tax return season, Christmas, and birthdays.

Culinary sauces spread over and fill in any cracks or fissures which exist in whatever dinner portion they’re poured over. Similarly, bonus months fill in any cracks or fissures in your budget by providing you with a built-in safety margin of unallocated income totaling 8% of your annual take-home pay.

Sauces put the finishing touches on each recipe they’re in. Bonus months put the finishing touches on your budget by providing the money needed to initially stock your sinking funds, end the stress of living paycheck-to-paycheck, build and replenish your emergency fund, and blast away your debt – even if your annual income remains static.

The typical sauce pulls the various ingredients in a given dish together. Similarly, this automatic, hidden bonus ties all of your budget ingredients together. If you’re paid weekly or bi-weekly, configure your budget to include only four (weekly) or two (bi-weekly) paychecks per month and give this secret budget sauce a taste.

Your Secret Budget Sauce Taste Test

For those of you who have been following the Master Your Money series from the beginning, below are the next steps on your journey to financial freedom:

  1. Check the 2018 calendar and identify your upcoming bonus months.

  2. Make a habit of increasing your budget for income in Mint at the start of each bonus month. This will properly update your monthly net profit as listed on the Mint Budget Scoreboard. Don’t forget to adjust your budgeted income back down at the start of the next month!

  3. Calculate the initial lump sum contribution required to bring each of your sinking fund accounts “current”. Do this by multiplying your monthly contribution amount by the number of months that have passed since the last bill or expense occurred.

    1. For example, the monthly sinking fund contribution for a $1,200 annual home insurance bill is $100 ($1,200/12). But if your bill is due in January and you didn’t begin making monthly contributions until June, you’ll only have $700 in your dedicated savings account by the time your next bill rolls around.

    2. To avoid this, multiply the number of months that have passed since your bill was last due (Four, February – May) by your monthly contribution ($100). This $400 is the one-time lump sum contribution required to get your sinking fund on track in its first year of creation.

    3. Consider using your monthly net profit or your bonus month paychecks to bring your sinking funds current. Start with your bill-related sinking funds first, focusing on the ones associated with bills which will come due soonest. Fund discretionary spending sinking funds last.

  4. Reinforce the power of using your bonus month paychecks for savings goals by reviewing the below five articles in the series:

    1. Beat The Blitz: Avoid The Unexpected Bill Scramble Drill
    2. Gimme Hands: The Power Of Being Selfish… With Your Future Self
    3. Beat Murphy’s Law With… The Classic Car Emergency Fund Model
    4. Strike It Rich By Mining Your Debt: There’s Gold In Them Thar Loans!
    5. Dancing On Ice: Your Cash Flow Choreography

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Financial Pilgrimage

An 80% savings rate is amazing!!

I get paid bi-monthly but may think about these hacks. Thanks for the tips!