Most people live paycheck to paycheck and fear the day when they will be laid off and they have to do without income coming in from their employer. I do not know the actual percentage, but from what I have read, it may be over fifty percent. Let’s assume that at least half of these people have been working for at least twenty-four years (because in places that I have worked, most of the workers are at least 45.) In the U.S. and most of the developed world, people start earning money in their teens. They get a regular job by the time they are twenty years old. If they go to college, they may be delayed a little and start a regular job at twenty-five. So they just have to be forty-nine years old to fit into the cohort I am describing – people who have worked for 24 years. (Assuming no lay-offs.)
These people should be able to live without a paycheck for 24 straight months! How? By the power of the third check. According to my calculation, people who are paid every two weeks get paid three times in one month twice a year. For example, there are a lot of people who will get a paycheck(1) in the first week of August 2007, they will get another paycheck(2) in the third week, and then get yet another paycheck(3) in the fifth week! This will happen again in January/February 2008. What do people do with this “paycheck windfall”? Spend it!
What if people put this paycheck away into money market account and didn’t touch it until they got laid off? Well, since you get these 3-checks-in-one-month twice a year, for every year that you work, you could have a month’s worth of paychecks put away. Thus, if you work for 24 years, you should be able to stay at least 2 years without getting a paycheck and still survive. At a minimum, I think you would be able to live the way you used to when you had just started working.
How about change in standard of living and cost of living?
Well, let’s assume you start off making $5 an hour before taxes. That is less than the Federal minimum wage. You work 80 hours per pay period, you get $400 before taxes. Your take home… let’s say for some reason it is only $300.00. You put this away in your first year of work and it is earning 5% interest compounded annually. My calculation is showing that your money will grow to $921.00 after 23 years (since we are assuming that you will be laid off after your 24th year of continuous work. Of course, I have not factored taxes into the equation, but I think that is a lot of money. I will posit that a person who made $300 a paycheck 24 years ago should be able to live on $921 today. In addition, one would have to start living frugally in order to accommodate the new reality: joblessness.
How about expenses that are incurred during the two week period in which you earn the money?
This question is saying: “I understand that I pay some of my bills, for example, rent or mortgage, car payment, utilities, etc, once a month. However, I eat every day, I drive my car to work each day, etc. How about these expenses? Am I not allowed to use some of that money in this paycheck? If I am allowed to use some of that money for these expenses, then your figures are off. First, I won’t save as much. Second, I won’t have as much to use in the future.”
Well, when I budget, I take into account expenses for the whole month, and these are covered by the two paychecks – the norm -regardless of whether a third paycheck will come or not. However, I will concede that you may eat a little bit into that paycheck, but just a little bit. We also have to consider that when you get laid off, you may not drive as much, or be forced to eat expensive (junk) food at work, or buy work clothes,… so your expenses may be lower! So this may take care of the difference between the exact figure required by the question and what my calculation is giving you.
When can you start?
Now. You have to think about it today. You have to make your decision to save that money today. Make sure that check does not find its way into your expenses, budgeted or otherwise.
Of course, you cannot spend all your income and put all your hopes on the third check, as an emergency fund. This would be foolish. There are other good personal financial management practices that you have to practice, click here for a good start.