Recently, about 50,000 Massachusetts state employees didn’t get paychecks.
What they may have gotten instead was a lesson in their own spending and saving habits.
The missing checks weren’t part of any budget crunch or legislative snafu. Instead, they were the first part of the state government’s move to biweekly pay periods and the first time certain state employees had to go a week without a check to cash. When the checks did arrive, they got two weeks worth of pay.
Biweekly paychecks are fairly common. Heck, there are plenty of places that pay employees on a monthly basis.
What’s unusual is the switchover, the time in the middle when the routine is disrupted and the money is missing.
Clearly, some affected state employees were unhappy, grumbling about having to stretch their money long enough to last the extra week without a cash infusion. Some took advantage of what their credit union called “a transition club,” setting aside a few dollars a week in the months leading up to the changeover in order to generate a de facto paycheck.
Other state employees barely noticed. They simply didn’t need the money to get through the week.
Most of us fit somewhere between those two extremes, the paycheck-to-paycheck, hand-to-mouth types and the getting-by-with-no-problems types. Consumer spending was up almost 7 percent last year, the biggest increase in 10 years and a gain that exceeded the growth in consumer income; for much of 1999, the nation had a negative savings rate, meaning that people spent more than they earned.
With Americans saving an all-time low of 2.4 percent of their after-tax income last year, it’s obvious that many people have no cushion to get from one pay period to the next.
That’s why missing a week’s paycheck could help you bring your personal situation into focus.
I’m not talking about not collecting the money owed you. I’m simply talking about experiencing what those state workers did last week, earning the money but having no access to it.
In short, stick your next paycheck in a drawer and see how long you can go without needing the money.
“We all live pretty close to missing our next paycheck,” says Shawn Connors of the Financial Literacy Center in Kalamazoo, Mich. “Even if you don’t lose your job, a big unexpected bill like a car repair or a busted water heater can have the same effect. The question is whether you can get through those times, and breaking your routine probably will give you some idea of what kind of shape you are in.”
If you can’t miss a pay period without feeling pinched or racking up debt–whether you get paid weekly, biweekly or monthly–you need to get a handle on where the money is going.
Credit and spending consultants frequently advise keeping a spending record to track where the money goes. Most people find such record-keeping to be a pain.
But if you can’t survive a missed paycheck, you don’t need a spending record to know you have a spending problem.
“Anyone who couldn’t miss a pay period is living right on the edge,” explains Robin Bullard Carter, who runs the counseling firm Money$ense in Newbury, Mass. “You have to find a way to live below what you earn, and that may involve making some unpopular choices. But that is better than having those choices forced on you when something goes wrong. . . . And if you can find a way to live significantly below what you earn, you have a chance to create real wealth for yourself.”
To get the most out of a miss-the-paycheck test, don’t just see how well you made it through the period without the money. Ask yourself the following questions:
– Do I have sufficient resources to weather a storm that’s bigger than this little test?
A week or two is not a huge storm. A long layoff or disability is. If missing a pay period had you feeling tapped out or, worse, added to your credit card debt, you need to expand your cushion.
Ironically, the state workers who joined the transition club to generate a current paycheck actually found a way to build a savings cushion. Having been able to live without the money they withdrew in preparation for the transition, they should now keep pulling out that money and setting it aside either in an emergency fund or for longer-term savings.
– Could I better match my cash flow and my bills?
For many people, spending and savings woes are a function of when the money arrives and when it goes out. If all of the bills are lumped together at one time of month, for example, they tend to feel crunched as the due date draws near.
There are several ways to combat this problem. One is to call creditors–the companies that bill you for everything from electric and phone service to credit-card issuers–to see if they will move your due date to a more convenient time.
This allows you to spread your bills more evenly (or to bunch them together so they are due right after a monthly check arrives). Managing when bills are due will help you move between paychecks without feeling panicked.
– What expenses could I trim so I would pass this test if I took it a second time?
If you fail the skip-a-paycheck test and can’t go a full pay period without cashing in, take a look at where the money goes and see what you can live without.
Be hard on yourself; drop the luxuries and the niceties and stick only with the necessities.
If you don’t make these choices on your own and ever suffer a real financial hardship, these decisions will be forced on you. But if you change habits now, you could avoid problems later.
– How far ahead of my expenses can I get?
Some financial advisers suggest locking up six months of expenses in an emergency fund. To my way of thinking, that’s too much money tied up in a low-yielding, safe account, and you might be better off investing some of the money and keeping just a month or two of expenses at hand.
To size up the value of your cushion, simply examine your expenses and see if you could pay off next month’s bills right now. If not–even if you passed the skip-the-paycheck test–you’re still precariously close to trouble.
– If I made it through this period without any trouble, what’s stopping me from increasing my savings?
Ideally, consumers will save somewhere between 10 and 20 percent of their income rather than the 2 percent national average. That’s equal to several paychecks per year.
Surviving a missed paycheck or two is proof positive that you can afford to save more on a regular, systematic basis. Have more money taken directly from your paycheck and plowed into an investment account.
After all, compared to missing an entire paycheck, setting aside a few more dollars each week is no sweat.
