Free Money That Appears Out of Nowhere

I freaking love free money. You should too. I get some every few months. And today I’ll explain how you can get some too, which you’ll sock away into your cash stash. It involves a bit of budget trickery.

One of the keys to maximizing your regular saving, and shortening your working career in the long run, is to make sure your expenses are staying low. Without tracking your expenses, there is just no way for you to tell hide nor hair of what can be cut, what is too big, what is too small, and what is a complete waste of your future nest egg. You track expenses with a budget.

I know, it’s boring. But if you’re just starting out ditching suckiness with money, you’ll have to live with it for a while until you’ve attained the rank of Money Jedi.

Some finance pros recommend budgeting, and some don’t… I’m not really a pro, but I do recommend it. If nothing else, it allows you a way to see where all of your money goes, so that going forward, you can set limits on cash flow and devise ways of reduces money flying out the door.

Those who don’t advocate budgets think that a budget is a “license to spend.” They think budget “limits,” rather than representing a spending constraint, become a license for “guilt-free” spending up until the limit is met. In other words, when you have money at the end of the month left in a category, you somehow feel better about going out to eat or buying new clothes, instead of socking the money away to make yourself more rich.

I’ve seen it play out in my own household in the past. It’s a toxic mindset. But that doesn’t mean you shouldn’t have a budget—it just means you need to be aware of this psychological shortcoming, and seek to eliminate it from your psyche. If you can do it, you’ll literally be paying yourself dividends later.

Where's My $4000 You Promised Me?

So what about this free money I mentioned?

You find it by using a simple budget trick to train you to live on less, save more, and ensure you always have a buffer to account for unexpected things, like medical costs, etc.

Typically when you establish a budget, you sit down and figure out your yearly salary. You divide that number by twelve for twelve months (I refer to this as the "12" method below), and that becomes your gross monthly pay. You deduct taxes and benefits like insurance, and 401k distributions, etc, and get a net dollar amount. Take this number and immediately put your decided savings amount aside and into the bank. Whatever is left becomes your monthly budget—your spending limit. You then allocate all money you receive into various categories to allow for necessary spending.

You have accounted for taxes and benefits. You have put money into savings and investment accounts. All your bills are paid for. You know exactly where your money is going. There are no shenanigans.

This is a sound way to craft a budget, but there is an even better way. This is how free money pops up every few weeks or months.

I don’t like to divide my gross salary by twelve, because this implies that once you hit your bottom line of spending every month, you are spending every dollar you make. This leaves you no room for unplanned expenses. It’s dangerous, and stupid. So let me do you one better.

Instead of dividing your yearly salary by twelve, divide the number by twenty-six, because most people are paid every two weeks. Then, multiply this number by two, and you get 4 weeks’ worth of spending—28 days. This will be your monthly budget spending.

What you’ve done is cram 30 or 31 days worth of spending (a month) into 28 days—forcing you to shave about 9% off your spending over the period.

Here’s what is awesome about my strategy: If you are paid every other Friday, twice a year you will get a WHOLE EXTRA PAYCHECK over the course of the month! If you are paid monthly, or even on the 1^st and 15^th, it means that you are giving yourself about 9% of your gross pay (after tax even!) which you can put into savings, into your emergency fund, or into investing.

I like to think of this strategy as the "hidden windfall" method. You get two windfalls every year.

How do these two options stack up? Let’s say you make $50,000 per year, and use the “12” method. Your gross pay comes to $4166.67 every month. You could use this for your budget maximum. After taxes, benefits, and aggressive savings, your net income for expenses comes to about $2500. You could live on this and spend the whole amount, but it won’t leave anything left over.

But what if you use the "26 x 2" method--take the $50k and divide it by 26x2? You get a total of $3846.15 every four weeks.

This leaves you with about $2200 for your budget amount, even after accounting for savings.

With the “26 x 2” method, you are ALWAYS going to be making more money than you have accounted for in your budget. That’s awesome, and it serves as the foundation for a healthy financial situation.

With this method, you don’t have as much money left over at the end of the month, so your budget is a bit tighter, but you get TWO EXTRA PAYCHECKS during the year, which will equal out to the amount you would be saving with the other method. This amounts to a BONUS payment of 50% of your monthly salary, twice a year when there ends up being 3 Payday Fridays.

Let me just point out—whatever method you use, you still have the same income. But the benefit of the second method (26 x 2) is that you are training yourself to live on less, be frugal, and be creative with your money, which puts you in financial black belt territory. It’s a psychological benefit.

Just about everything we do with our money is psychological. It’s about mental training, discipline, thinking, strategizing, shopping around… and basically, avoiding doing stupid things.

When you get your extra two paychecks twice a year, you will feel so rich! Just don’t blow the money on crap like most people do with a tax return. Put it to work IMMEDIATELY!

I get paid every two weeks on Fridays. How this works for me is, twice a year there happen to be three Fridays in a month. BOOM! I get paid an extra 50% that month! And I sock it away into my investment account, or to pay off my long-term debt.

As I emphasized, if you get paid monthly, you won’t get an “extra paycheck”… but it’s the same thing. Your money will be automatically set aside every month without getting spent, and without being required to make your budget... I’m not gonna lie, it’s freaking genius.

I hope you enjoy this “free money” trick. You’re welcome. I’ll get my bank account and routing number to you soon so you can express your thanks.

Live long and invest,

Jeremiah