Most teachers are confronted with the dilemma of choosing between these two payment options. From a financial standpoint the answer lies in a teacher’s discipline and financial needs.
Discipline
Most of the time young teachers are encouraged to take a 12-month payment option, while seasoned veterans are able to use the school year method. Ideally, you should take the income as it occurs, or as it happens during the school year. However, the reality is that if you take the payments over the school year you will be tempted to believe the 9 months or so of payments are going to continue for the full year. This may lead you to overspend.
This is especially true for young teachers who are inexperienced with handling money and who have a very optimistic, if unreal view of life. They see the larger school year paychecks as somewhat of a godsend and forget that they need to budget or average it out for the entire year. For example your paycheck for the entire year is $45,000 so it would pay $3,750, for 12 months, while a school year payment schedule would pay $5,000 per month for 9 months. This is before taxes on both cases.
The bills we pay are usually on a monthly basis so the school year paycheck may lead one to believe the payments are also monthly, which can lead to coming up short in July, August and September.
Seasoned teachers have learned to budget and have come to grips with the reality of a contract is a contract is a contract so they see the higher school year payments as a year’s worth of work so they take the school-year payments and divide by 12 so their income matches their outgo.
Financial Needs
In finance school you are taught:
1. Use other people’s Money (UPOM), and
2. Get your hands on today’s dollars as soon as possible.
Over the long run you are better off taking the payments as you earn the money, especially if you are investing some of the income in a dollar cost averaging approach (See “Dollar Cost Averaging” in A Teacher’s Pocket Guide to Finance). While the advantages seem minimal they represent your understanding of financial concept of investing today’s dollars. This is much like the old adage “a bird in hand is worth two in the bush”.
By taking your income on a school year basis you:
1. Have the money to invest for dollar cost averaging purposes and,
2. You have the money in your hands, not in the hands of district, which is probably using your money to earn interest for the district.
While you might be altruistic in allowing the district to use your money, ask yourself if you have a tax refund coming, do you wait until October for the refund or do you take the refund as soon as possible? Your tax advisor will tell you to file and get your refund as soon as possible so you have the money in your investment account, not in the US Treasury, where the Government is earning on your money.
Today’s Dollars are more valuable than tomorrow’s dollars, especially if you figure in inflation and opportunity cost. Earn and invest and by all means live!