We’ve all been told that living paycheck to paycheck is no way to build a solid financial foundation. Yet, a recent study concluded that nearly one-third of Americans live this way, running dangerously low on money before their next paycheck arrives.
These folks know all too well the anxiety that comes from watching their bank balances dwindle until their next payday. They develop a keen awareness of the recurring and unexpected expenses that eat away at their checking account every two weeks.
With a little organization and elbow grease, you can harness this awareness and create a highly effective personal budget based around your pay periods. By focusing on a two-week period of cash flow and expenses, you can develop a budget that assigns each incoming dollar a purpose, and helps ensure that it achieves those objectives before your next paycheck arrives. The budget by paycheck method can be the basis for healthy and disciplined spending habits.
What is budgeting by paycheck?
Most popular budgeting methods are structured around monthly or annual spending cycles, but many budgeters find it more rewarding to work with income and expenses over a shorter period of time. The budget by paycheck method is built around the typical two-week pay period. Expenses that occur during that period are charged to that paycheck, with an allocation set aside to cover less frequent expenses and savings. A shorter period of time allows you to keep a close eye on your budget, allowing you to ensure that each dollar that arrives on payday meets its assigned purpose within that period.
Building the budget
Like any budgeting method, you will need to start by identifying four groups of expenses:
·Fixed expenses: Recurring items are not likely to change, including, rent, car payments, insurance premiums and phone bills.
·Variable expenses: Expenses that recur but are not fixed dollar amounts. Groceries, variable utility bills and the occasional night out at the movies qualify. You may choose to place credit card payments here as well.
·Irregular expenses: These expenses can be expected or not, and tend to arise only occasionally. Birthday gifts for friends and family, vacations and the unexpected home or auto repair fall into this category.
·Savings: Treat this as a recurring expense and you will be more likely to put away a small amount every two weeks. Do not stress over the dollar amount—the point is to get in the habit of putting a little something aside for the future.
Once you have identified these expenses, take a look at your incoming cash flow. Typically, this comes in the form of a paycheck every two weeks. Does your paycheck always arrive on certain days of the month or does it stick to a strict two-week pattern? Do you have any other income, such as child support or social security? And when does it arrive?
Next, assign the expenses you identified above to a particular pay period. It may help to use an old-fashioned paper calendar for this step. Most of your expenses have a due date you can use to help place them. For example, if your water bill is due on the 10th of the month, put it on the calendar and assign it to the paycheck that coincides with that date. You may have to split large, variable items such as credit card bills between pay periods. This will be possible only if you have a realistic idea of your average monthly bill.
Take any leftover income and set it aside for irregular expenses and savings. Treat both of these categories as regular expenses each pay period.
Pros and cons of budget by paycheck
The budget by paycheck method is not necessarily the easiest method of budgeting. It requires that you take a close and honest look at your spending habits and income and build a careful spending plan multiple times per month. You may lighten your workload by importing expenses and income from previous periods, but the system can fail you if you don’t manage each pay period individually.
For many people, the primary advantage of the budget by paycheck method is that it is directly tied to their actual cash flow. Dollars arrive in your account and you have already determined where they will go. You should find that those dollars are gone by the end of the pay period, but the good news is that you have met your expenses and set aside some savings for the future.
Integrating budget by paycheck with other methods and apps
If you have already found some success with other budgeting methods, you may be able to integrate the budget by paycheck method into your existing plan. For example, the budget by paycheck method already shares features with zero-sum budgeting, where you assign every dollar a destination. According to this strategy, by the end of the month, there is no money left unallocated to expenses and savings. The 50/30/20 rule can provide you with targets for your spending habits, encouraging you to allocate 50% of your income to needs, 30% to wants and 20% to savings. The envelope system can be an effective way to manage smaller expenses, encouraging practitioners to allocate cash amounts to different expenses and then spending only that amount.
Consider using a budgeting app that allows you to adjust budgeting cycles to line up with paydays as a way to keep your budget by paycheck plan on track. Budgeters looking to stick to old-fashioned pencil and paper may consider the Stash’s 50-30-20 worksheet, a handy resource specifically designed for budgeting.
The budget by paycheck method works for individuals who don’t mind putting in the time to take a more detailed approach to their cash flows. Tweak it or integrate it with other budgeting methods to make it a strategy that you can stick to.