When To Borrow Money From Your Paycheck... And When Not To
Borrowing money from yourself through a payroll advance can seem like a reasonable thing to do if you’re short of cash one week.
After all, you’re borrowing from yourself, so what’s the harm?
Plenty, if you’re not financially disciplined.
Getting your paycheck early is a fantastic perk from your employer, but if used too often the smaller paychecks in the weeks following a payday advance can leave you in a debt hole that’s hard to get out of.
Still, there are times when borrowing money from your future self makes sense. If you don’t have good credit and thus not many loan options, or don’t have an emergency fund to fall back on, payroll advances can be a worthwhile lifeline.
What’s A Payroll Advance?
A payroll advance is exactly what the name implies: Your employer gives you part of your paycheck early, in advance of when you’d normally receive it.
You’ve already earned the money, so the idea is that you should be able to get it sooner than on your regular payday.
The amount of money advanced through what is essentially a loan is decided by the employer. The money isn’t repaid like a loan, but any amount taken early is subtracted from your next paycheck.
Payroll advances can also come with fees paid to the employer. While not ideal, they’re likely to be cheaper than fees for payday loans or online installment loans.
Fifteen percent of companies offer payroll advances, according to the Society for Human Resource Management.
Advances From Apps Such As Earnin
Third-party apps such as Earnin also offer paycheck advances. Earnin is cheaper than a payday loan, offering advances of $100 to $500 without fees or interest charges. Instead, users are asked to “pay what’s fair” for the service.
The app requires access to your checking account. Your employer must pay you through direct deposit. Earnin gives you a cash advance and pulls money out of your checking account to repay that amount when your paycheck is deposited by your employer.
When To Use A Payroll Advance
Borrowing money from yourself, through your employer, can seem like an ominous task. You’re borrowing money from your future paychecks, and you’ll need that money then also. Why borrow money now when you’ll need it later too?
That’s a tough question to answer and one worth considering before getting a payroll advance.
The best answer is that you can afford to live with a smaller paycheck in a few weeks, and have a household budget to help you determine where you can save money for a while to make up the difference.
One of the most likely times when a payroll advance is needed is an emergency expense. Your car may have broken down, a family member had an emergency visit to the hospital, or some other unexpected bill has hit your finances.
A better use is for short-term expenses that aren’t as large as many emergency expenses can be. If your children need new clothes now for school, but you don’t get paid for two more weeks when you planned on buying them new clothes, a payroll advance could help you make those purchases now.
The point is that you need money now. A payroll advance can make that happen if you’re willing to deal with a lower paycheck in a week or so.
Discipline with your finances is key here. Preferably, a payroll advance is a one-time thing and you don’t need it for daily living expenses. If you do, then it’s time to cut your expenses or find a job that pays better.
When To Not Get A Payroll Advance
If you find yourself needing a payroll advance again and again, then you have bigger financial problems that getting your paycheck early won’t solve.
Having a lower paycheck than normal every week for months and months because you constantly need to be paid early can lead to a downward financial spiral. Sooner or later your employer will likely stop offering payroll advances to you.
How much money you can borrow depends on your employer, but it won’t be unlimited.
If a payroll advance won’t fix underlying issues such as not having a budget or living beyond your means. If you’re using the loan to buy a new outfit or trick out your car, then a payroll advance doesn’t make sense.
To avoid the need for a payroll advance or any other type of loan, start by tracking your spending and start an emergency fund with any extra money you can find. Starting a budget should help you find areas to cut so you can get an emergency fund started.
And if you do get a payroll advance, try to make it a one-time thing. Your future self, which is only two weeks away, will be thankful.