Author Topic: 26 Pay Periods  (Read 7955 times)

arizonawildcats

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26 Pay Periods
« on: March 25, 2015, 09:51:36 PM »
Hi,

I love the site - - this is my first post.   There is one strategy I have utilized since graduating college.   A lot of employers pay employees every two weeks.   This works out to be a total of 26 pay periods in most years.   I learned early on that I could pay my bills and fund investments with the two normal pay periods in one month.  This allowed me to use the two "extra pay checks" each year to fully allocate towards investing or debt reduction to increase net worth.   I'm 45 years old now and have used this approach for over 20 years.  It's found money if you plan accordingly.   

RWD

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Re: 26 Pay Periods
« Reply #1 on: March 25, 2015, 10:45:29 PM »
I've always been paid bi-weekly and also noticed the "extra" pay check months. But I was already living beneath my means even with just two pay checks per month, so it was just an added bonus to savings.

It's a good practice to treat windfalls (extra pay checks, tax refunds, bonuses, etc.) as investment money. I've never understood the mentality of people who treat these sorts of things like free cash that has to be spent on some consumer item.

misschedda

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Re: 26 Pay Periods
« Reply #2 on: March 26, 2015, 08:27:02 AM »
And for many people on a biweek schedule, this year is a 27 pay period year, so there are even more extra pay checks. I think those happen every 11 years or so.

Cougar

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Re: 26 Pay Periods
« Reply #3 on: March 27, 2015, 12:00:36 PM »

THANK YOU FOR THIS !

i had been running calculations all year on two payments a month. i just figured i'm actually contributing another 150 a month because i'm really paid 26 times also.

ltt

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Re: 26 Pay Periods
« Reply #4 on: March 27, 2015, 12:10:32 PM »
I've always been paid bi-weekly and also noticed the "extra" pay check months. But I was already living beneath my means even with just two pay checks per month, so it was just an added bonus to savings.

It's a good practice to treat windfalls (extra pay checks, tax refunds, bonuses, etc.) as investment money. I've never understood the mentality of people who treat these sorts of things like free cash that has to be spent on some consumer item.

Well, we had tax refunds and some other additional money this month----we need a new front door-----badly.  I'm not sure a door is considered investment money................

Sid Hoffman

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Re: 26 Pay Periods
« Reply #5 on: March 27, 2015, 12:11:00 PM »
And for many people on a biweek schedule, this year is a 27 pay period year, so there are even more extra pay checks. I think those happen every 11 years or so.

For anyone to whom this year is still a 26 pay period year, next year is your 27 pay period year.  Unfortunately, I know from what I've seen my own employer do with salaries employees is that they'll just divide our salary by 27 next year so each paycheck is smaller next year, but we'll get 27 of them.  If you're salaried, that's actually the right way to do it since the employer's agreement is a set number of dollars paid to you per calendar year.

RWD

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Re: 26 Pay Periods
« Reply #6 on: March 27, 2015, 02:08:25 PM »
I've always been paid bi-weekly and also noticed the "extra" pay check months. But I was already living beneath my means even with just two pay checks per month, so it was just an added bonus to savings.

It's a good practice to treat windfalls (extra pay checks, tax refunds, bonuses, etc.) as investment money. I've never understood the mentality of people who treat these sorts of things like free cash that has to be spent on some consumer item.

Well, we had tax refunds and some other additional money this month----we need a new front door-----badly.  I'm not sure a door is considered investment money................

Wouldn't that be covered by your emergency fund? Or perhaps part of a house maintenance budget?

turketron

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Re: 26 Pay Periods
« Reply #7 on: March 28, 2015, 12:17:28 AM »
I don't have my 401k fully maxed this year, not because I'm spending the money but because I'm also investing 15% in my company's ESPP plan. For the two extra pay periods I'm planning on bumping my 401k contribution to 100% for that check only.

mmm8190

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Re: 26 Pay Periods
« Reply #8 on: March 28, 2015, 01:38:54 AM »
And for many people on a biweek schedule, this year is a 27 pay period year, so there are even more extra pay checks. I think those happen every 11 years or so.

For anyone to whom this year is still a 26 pay period year, next year is your 27 pay period year.  Unfortunately, I know from what I've seen my own employer do with salaries employees is that they'll just divide our salary by 27 next year so each paycheck is smaller next year, but we'll get 27 of them.  If you're salaried, that's actually the right way to do it since the employer's agreement is a set number of dollars paid to you per calendar year.

Your pay is based per year, but you are paid bi-weekly (salary/365*14).  You are assuming all paychecks in a calendar year are for work within the calendar year, which is obviously not true.  That first paycheck is for work in the previous year.
« Last Edit: March 28, 2015, 01:48:07 AM by mmm8190 »

Hey It's Me

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Re: 26 Pay Periods
« Reply #9 on: March 28, 2015, 02:08:40 AM »
I don't have my 401k fully maxed this year, not because I'm spending the money but because I'm also investing 15% in my company's ESPP plan. For the two extra pay periods I'm planning on bumping my 401k contribution to 100% for that check only.

Careful on the math here: 401(k) contributions can offer more benefits than ESPP. Many ESPP are 15% discounted, which means a ~18% immediate return on investment; if your tax rate is more than that, you should be maxing out that 401(k).

turketron

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Re: 26 Pay Periods
« Reply #10 on: March 29, 2015, 01:11:52 PM »
Thanks for the heads up, but yeah I've done the math and it's pretty heavily in favor of the ESPP; right now it's trading at ~3x the (discounted) purchase price I get, so it's way more than just the base 15% return. I'm only slightly below maxing the 401k out, so I'm not too concerned. My company also doesn't provide a match so I can min/max my contributions at any point during the year without worrying about missing the match.

Cathy

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Re: 26 Pay Periods
« Reply #11 on: March 29, 2015, 02:00:52 PM »
And for many people on a biweek schedule, this year is a 27 pay period year, so there are even more extra pay checks. I think those happen every 11 years or so.

For anyone to whom this year is still a 26 pay period year, next year is your 27 pay period year.  Unfortunately, I know from what I've seen my own employer do with salaries employees is that they'll just divide our salary by 27 next year so each paycheck is smaller next year, but we'll get 27 of them.  If you're salaried, that's actually the right way to do it since the employer's agreement is a set number of dollars paid to you per calendar year.

Your pay is based per year, but you are paid bi-weekly (salary/365*14).  You are assuming all paychecks in a calendar year are for work within the calendar year, which is obviously not true.  That first paycheck is for work in the previous year.

Let's apply some math to this problem.

Assume the following:
  • Your contractual agreement is that you are paid $100,000 per year.
  • You are paid biweekly so you are paid $3846.15 every two weeks.
  • You work at the same company for 25 years and then immediately quit after the 25 years are over.
  • The employer does not adjust paycheck amounts for 27 paycheck years.
How much money will you have received in total after the 25 years of employment?

First we need to determine how many weeks are in 25 years. This can vary, but for our purposes we will assume that a year has 365.242 days, so 25 years has 9131.05 days or 1304.44 weeks, which means 652.22 paychecks. So your total pay received after 25 years is approximately $2,508,536.

However, according to your pay agreement you were only "supposed" to receive $2,500,000, so you did indeed get some extra money over the course of 25 years, namely $8,536 in extra money after 25 years.

Now, the next question is, does adjusting paycheck amounts for a 27 paycheck year result in the "right" amount of money being paid, or does it cheat you out of money?

For that, we need to find how many 27 paycheck years occur in 25 years.

We said there were 1304.44 weeks in 25 years, or 52.1776 weeks per year. This also means there are 52.1776 Fridays per year. Thus, a year contains on average 26.0888 paydays. Thus, there will be a 27 paycheck year every 1/0.0888=11.26 years. Thus, 25 years contains on average 2.22 years with 27 paychecks.

The next question is: how much is your pay reduced by in a year if the employer adjusts paychecks for a 27 paycheck year? The answer is that your pay is reduced by 3846.15*27-100000 = $3,846.05. So over the course of 25 years, you would lose 2.22 times of that, namely $8,538.23, compared to an employer who does not modify paychecks for 27 paycheck years.

We already found that after 25 years, an employee whose paychecks are not modified for 27 paycheck years would have received $2,508,536. We now subtract the $8,538 we found above and we arrive at $2,500,000, the exact amount you were entitled to be paid under the employment contract.

In conclusion, an employer who does not modify paychecks for a 27 paycheck year is giving a small bonus to employees, and is not required to do so under the employment contract (assuming the contract is that you are paid $100,000 per year). Modification of the paycheck amount for 27 paycheck years is mathematically sound assuming you work long enough.

There is, however, a major caveat. Depending on when you leave, you might actually be slightly underpaid such that the employer would have to pay you a "true up". If your employer does not have a process for calculating this, they may be engaging in illegal wage theft. For example, if you leave after the first day of a 27 paycheck year, you would be owed a true up because that upcoming paycheck is actually for work in the previous year. If you stay employed long enough, this averages out, but if you quit at the "wrong" time, you are cheated out of wages. The modification only works out in the long term. In the short term, you may be underpaid at times. Thus, an employer needs to be prepared to calculate "true up" amounts for departing employees.

However, if your contract is that you are paid a certain amount per two weeks, none of this applies, and an employer obviously could not adjust the pay for 27 paycheck years.
« Last Edit: March 29, 2015, 02:18:57 PM by Cathy »

mmm8190

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Re: 26 Pay Periods
« Reply #12 on: January 24, 2017, 08:34:24 PM »
I didn't want to make this difficult, but I need to correct the misunderstanding.  The number of paychecks in a year has nothing to do with bi-weekly pay rate.  I hoped my first thought experiment would be enough to explain this folly but I'll try to explain it another way.  Though the number of paychecks has nothing to do with bi-weekly pay rate as a salaried employee, what technically could affect it is leap years.  In that case your employer could adjust your bi-weekly pay rate to salary/366*14 (0.27% reduction from a non-leap year).  My employer did not do this.  It would create a payroll department nightmare for the first paycheck of a leap year and the first paycheck after a leap year since they'd have to pay multiple rates depending on what year the specific hours were worked in.  The book value of unpaid vacation hours would also change in leap years which would be a nightmare for company reporting of liabilities.  Probably a bigger reason for not doing it is knowing they would have to explain to employees every leap year why  their paycheck shrunk 0.27%.  In such a scenario, most employees would just label their employer as cheap for doing it.  The morale hit would probably not be worth 0.27%.  In the 25 year example, paying extra every leap year would mean (5 or 6 or 7)*($100,000)/365  of extra pay (leap years have rules beyond every 4 years like 2000 was not a leap year).  If the example was for 1992-2016, there would be 6 leap years leading to 6*$100,000/365 = $1643.84 of extra pay (0.066%)

Cathy

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Re: 26 Pay Periods
« Reply #13 on: January 24, 2017, 11:40:57 PM »
I didn't want to make this difficult, but I need to correct the misunderstanding. ... I hoped my first thought experiment would be enough to explain this folly but I'll try to explain it another way.

What exactly is the "folly" that you believe you have spotted in my two-year-old post? Your post doesn't seem to identify one.

2Birds1Stone

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Re: 26 Pay Periods
« Reply #14 on: January 25, 2017, 05:55:35 AM »
I miss those extra 2 paychecks per year. I was paid like that for 4 1/2 years. Now it's been 2X per month for the past 25 months.

Shor

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Re: 26 Pay Periods
« Reply #15 on: January 25, 2017, 04:11:18 PM »
Hmm, your contract states that you are paid $100,000 per year, that is what you should get paid.
Payroll is a nightmare just trying to get the right check to the right person on the right day, so they couldn't handle actively calculating based on the varying number of years and which day you start. They could attempt it, sure, but there would be so many more mistakes when they already so easily screw up the 'simple system'.

For example, if by some awesome fluke in the Gregorian calendar, the year 2018 somehow ended up being only 1 day long,
According to your contract you should get $100,000 for that one day.
According to the spirit of your contract the pay schedule would just continue and we all would ignore that imaginary year.
Yet according to Payroll, they wouldn't even touch the system but they still won't have your check ready by Friday!....

I kid, of course. Those guys try so hard at a job that will be automated out..

Sid Hoffman

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Re: 26 Pay Periods
« Reply #16 on: February 10, 2017, 01:11:24 PM »
Hmm, your contract states that you are paid $100,000 per year, that is what you should get paid.

For example, if by some awesome fluke in the Gregorian calendar, the year 2018 somehow ended up being only 1 day long,
According to your contract you should get $100,000 for that one day.

I went through this with my own employer because they have a payroll abnormality where they short us every year by about 0.4% or so.  They say it's because of a discrepancy between the hours worked and the hours in a year.  We're all salary though - everyone in the department over the $50k or whatever to be listed as exempt employees.  This was a new change too, or at least new as of 2010 or 2011.

I'm not overly upset about it, but it's one of the biggest companies in America, way up in the Fortune 500.  For them to play games with payroll seems reckless and inviting of a payroll lawsuit down the road.  If they want to claim they can underpay us because of hours, we'd have to be hourly employees.  However then they'd have to pay us overtime, which they don't want so they categorize us as exempt salary employees.  They're trying to have it both ways: short us on pay and justify it on an hourly basis, but refuse to pay overtime by listing us as salary.