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If you need to take control of your finances, budgeting by paycheck might be just what you need.
A budget is just a blueprint, plan, or strategy for how you intend to use your money.
It’s based on YOUR money and YOUR lifestyle.
Before You Begin
Before you can start successfully budgeting, you need to know where your money is going.
Think you know? Maybe you do but there’s a good chance you’re wrong. Almost everyone who doesn’t track their spending is incorrect about how much they’re spending on something.
So, before you start a budget, TRACK YOUR EXPENSES for a few weeks.
Once you’re aware of what you’re spending money on, it’s easier to PLAN how you’ll spend your money (ie use a budget).
You can track your expenses using paper, or an app (I use Toshl, but I’ve also seen Mint highly recommended).
What is Paycheck Budgeting?
Paycheck to paycheck budgeting means that every time you get a paycheck, you sit down and make a budget for it.
If you get paid weekly, once a week you make a new budget.
If you get paid bi-weekly, that’s how often you make a new budget.
If you get paid bi-monthly, how often will you make a budget? Twice a month!
What are the benefits of the Budget by Paycheck method?
There are a number of benefits of paycheck budgeting.
- You won’t run out of money before the end of the month.
- It’s highly adaptable meaning you can make changes easily if needed.
- You’ll have a clear, recent understanding of your money.
- You have to evaluate your finances (and spending!) often.
What are the drawbacks of Paycheck Budgeting?
There’s really only one big drawback of the budget by paycheck method:
- every pay period you have to make a new budget. This can be a time-consuming (and tedious) process.
Who should Budget by Paycheck?
Budgeting by paycheck is a great option for pretty much anyone, but it’s especially great for:
- people with regular paydays
- people who run out of money before payday
- people who struggle with impulse purchases
- people who have no clear idea where their money goes
- people who are new to budgeting
Who should try a different budgeting method?
People who get paid irregularly should definitely try a different budgeting method.
How to Budget by Paycheck
Almost all paycheck by paycheck budgeters do so with a calendar. Otherwise, you might be short money in the next pay period if you have a lot of bills or a large irregular bill coming up.
Also, using a calendar makes budgeting more visual. This can make your income and expenses a lot clearer and easier to understand.
Budget by Paycheck Step-by-Step Guide
Budgeting by paycheck is simple to set up. Get started by following these steps.
I’ll show you an example every step of the way. The example is based on a biweekly pay period (getting paid every other Friday).
Step 1. Income & Fixed Expenses
Mark your income and all your fixed expenses on your calendar for the upcoming pay period. You can do this by hand, in Excel, or any place you’d like.
What are fixed expenses?
Fixed expenses are ones that occur regularly for the same amount. Things like rent, car payments, insurance.
Step 2: Necessary Variable Expenses
Add up your necessary variable expenses (from this payday until the next).
What are necessary variable expenses?
Variable expenses are the ones that have different amounts each time. Here, you’re only counting the things that are necessary (as in, you can’t live without them). Things like electricity, groceries, gas, car repairs.
Tip: If you have a lot of bills occurring at the same time of the month, call some of them and ask to change your billing/due dates. Many providers will be happy to accommodate your request.
Step 3: Discretionary expenses
Add up your expected discretionary expenses (from this payday until the next). Subtract this total from your Step 2 balance.
What are discretionary expenses?
Discretionary expenses are a type of variable expense. These are the expenses that you choose to spend money on but don’t need. Things like Starbucks, eating out, concert tickets.
Note: there’s nothing inherently wrong with discretionary expenses. You work hard for your money and deserve to enjoy some of it. However, these are the expenses that are easiest to reduce or eliminate if you need to save more (or spend less).
Step 4: Income less Expenses
Add up all the expenses (fixed, variable, and discretionary) from this payday until the next. Subtract this total from your income.
Step 5: Sinking Funds
Allocate (and set aside) money to your sinking funds. Subtract your sinking fund contributions from your step 4 total.
What is a sinking fund?
A sinking fund is an account you have that is used to gradually save money for a specific purpose.
Budgeting by paycheck doesn’t allow for a lot of regular large expenses. To correct that, you set up sinking funds for major upcoming expenses in advance and fund them every paycheck.
For example, many budget by paycheck people set up a Christmas sinking fund. If you expect $500 in Christmas expenses, you could set aside $20 every pay (assuming biweekly) and you’d be saving $520 a year. Whenever you spend money on Christmas items (gifts, decorations, whatever), you would pay for them from your sinking fund NOT your regular account.
Check out this post on Sinking Funds for more information.
Step 6: Safety Net
Give yourself a safety net. Subtract from your step 5 total. How much money is remaining for this pay period?
What is a safety net?
A safety net is a little bit of extra money you budget for just in case. It will cover small emergencies, unexpected price increases, and other things like that.
How much should your safety net be?
$50 a week is a sufficient amount (so $100 if you’re being paid bi-weekly).
Some people like to do it as a percentage (5 to 10) of their fixed and variable expenses (not including rent/mortgage).
Remember: the safety net is to cover emergencies or unexpected changes (by other people). It’s not meant to be used as discretionary spending or impulse purchases.
Step 7: Next Pay Period
Do steps 1-6 for the next pay period. How much money will be remaining next pay period?
Note: you might have a negative! If so, you’ll take care of that in step 8. If not, then you don’t have to do anything more for the next pay period until your next pay.
Tip: Keep this budget. You can use it as your current pay period next time you get paid!
Step 8: Allocate Remainder
Allocate your remaining funds from step 6 to the next pay period (if you have a negative at the end of step 6), debt repayment, investment, or savings.
What should I do with extra money?
First, make sure you allocate enough to cover the next pay period.
Next, depends on your financial situation.
I would strongly advise you to pay off any consumer debt (credit cards, retail shopping, and the like) as quickly as possible.
You should also try and fund an emergency account. I like to keep my emergency account funded with enough to cover my expenses for 3 months. If you’re just getting started, even a few hundred dollars can be a great start.
Once you’ve paid off your consumer debt and funded your emergency account, you can look into investment options. Woohoo!
Step 9: Live & Evaluate
Follow your plan (as best as possible). Markdown your final numbers at the end of the period and compare them to the plan. Evaluate your spending.
- What went wrong?
- What went right?
- Do you need to make any amendments going forward?
Step 10: Repeat
Repeat steps 1-9 every pay period.
Cut yourself some slack, budgeting takes practice and you’ll get better as you get more used to it.
It’s Easy to Budget by Paycheck
Once you get going, a budget by paycheck is an easy way to manage your finances.
Give it a try! Let me know how it goes in the comments below.