Does It Matter How Often You Get Paid? YUP!
Updated: Jul 21, 2020
Weekly, bi-weekly, and monthly are normal but is there a difference?
The Time Value of Money
In short, you want to get paid as soon as possible. This is because of a concept called, "the time value of money" which essentially means that the sooner you get your money the sooner you can use it to make more money.
If it's hard to imagine try taking it to the extreme on both sides. Imagine getting your salary today. You could put that money into an account that gains interest and end the year with more money then your salary actually paid out. Now imagine getting paid your salary but being paid out over a 5 year span. You'll feel like you'll never get your money! Never mind even accounting for interest or inflation.
An Example of Paycheck Frequencies
For paychecks this means that if you get paid weekly you can put that money into good use faster than if you were bi-weekly and monthly. Now for an example. If you're making $50,000 a year and you put your money into a savings account making 2.57% (link for actual savings account) you can see below how you make more money in interest with weekly than you would with bi-weekly or monthly:
That's a difference of $34.50 or $61.26 for just the frequency! If we compound this over a span of 40 years (a number I like to use for saying "if you did this until you retired") then it would be be an extra $2457.32 or $4362.89 for weekly over bi-weekly and weekly over monthly, respectively.
If we instead used an account that made more, like the S&P500 (which you would ideally want to use) the numbers become:
This time around the differences are:
Bi-Weekly to Weekly: $93.96 a year / $20,164.36 overall
Monthly to Weekly: $166.77 a year / $35,790.91 overall
Teachers are a great example of who this can benefit. Often times they have the option of choosing to get paid over 10 months or 12. Using the same principle as the examples above you'll know that teachers would benefit more from 10 pay periods than 12, mathematically.
What we want to take away from all of this is that you want money as soon as you can. Although the difference of $34.50 a year might not seem like a lot to some, it adds up to a lot at the very end due to compounding. Additionally, there may be other places where you can see lost value like how some companies match 401(k) plans annually rather than a per paycheck basis. Imagine the opportunity cost there! And although it is uncommon for you to be able to have control of this there are times where you do.
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