Should I get paid on 20 or 26 pays?

[ScrimpAndSave]

I'm a teacher and I have the option between the two. I know I could send certain amount to my credit union and not touch it till the summer comes...but is there any advantage to getting paid in 20 pays?

Thanks!

[simpletron]

I going to make a couple of assumptions:
1. you get paid the exact same total amount for the school year either way
2. your pay year starts in mid-august(when school starts)

on the plus side for 20 pays, the amount you save earns interest before you spend in summer.

on the down side, you get more of your pay in the earlier year, which means higher taxes. for example under 20 pays, for 2009 taxes, you would earn 50% of your 08-09 pay and 50% of 09-10 pay whereas under 26 pays you would earn 62% of 08-09 pay and 38% of 09-10 pay. since you'll make more the in 09-10 year, you make more total in 2009 with 20 pays. you'll pay higher taxes every year except your last year. the additional taxes is 12% of the pay increase x marginal tax rate.

I have no clue whether or not you'll earn more interest than you'll lose in additional taxes.

I have a friend who is also teacher. she takes the 20 pays and budgets her life on two of those paychecks because her bartending job over the summer pays more. she did it this way because she knew she would spend down her savings from the summer too quickly in fall and be living on a tight budget in the spring.

[money2009]

I didn't think about this question from a tax perspective. Good catch simpletron.

[marvholly]

There should be NO tax consequences as pay is annualized for tax puposes. What REALLY counts here is how well you budget/handle money.

Will you REALLY save into your CU account for 10 months? Can you set it up to be automatic so you have NO choice? If yes, then I suspect you will be a bit ahead from the interest on the CU account.

However, if you are like MANY you will delay CU deposits and spend more than you shoud if you are on the 20 pays schedule. I am able to do something like this as I transfer $$$ every month to my MMA for those BIG annual & semi-annual bills (auto & home insurance, real estate taxes) BUT I know WAAAY to many people who scramble for the $ when those bills come.