A quick Google search of budgeting methods will show you that there’s no shortage of options out there. Unfortunately, without trial and error, it can be difficult to tell which strategy is right for you. There is however one particular budgeting method that could work well if you are just getting started with budgeting. And more so if you don't like the idea of a monthly budget. This particular method involves creating a budget by paycheck.
Budgeting by paycheck can help take some of the overwhelm out of the conventional monthly budget. You’ll get a super clear understanding of the money coming and going from your bank account. You’ll also be able to avoid overdraft fees once and for all due to more frequent planning.
What does it mean to budget by paycheck?
Budgeting by paycheck is a strategy where, rather than budgeting just once a month, you budget as often as you get paid. Because most workers get paid either weekly or biweekly, paycheck budgeting can be a good way to stay involved with your finances. Especially since it requires you to plan the money in your bank account as often as you get paid.
When you budget by paycheck, you assign each of your expenses to a specific paycheck. For example, Let’s say you get paid on the 1st and the 15th of each month. If rent is due on the 1st, you can plan to use the paycheck from that pay period. If your cell phone bill is due on the 20th, you can then pay that bill with your second paycheck of the month.
How can having a paycheck budget be beneficial?
Using a paycheck budget is a great way to get started with money management and begin embracing healthy financial habits. First, paycheck budgeting gives you a clear understanding of where each dollar is going. You probably know roughly how much money you earn and how much you spend each month. However, budgeting by paycheck really shows you where the money from each paycheck goes.
Next, paycheck budgeting helps avoid overdraft fees. It can also keep you from running out of money before you get paid again. If you know exactly which expenses will come out of each paycheck, you can make sure you aren’t spending more than is actually available to you before your next paycheck.
Many people put expenses on a credit card and then pay it off each month. This can become problematic when you’re spending money you haven’t actually earned yet. It gets even worse when you spend more on your credit cards than you'll earn to pay off. This contributes to the fact that more than half of Americans carry credit card debt. Paycheck budgeting can help fix that.
Finally, this budgeting method forces you to be checking in with your finances on a regular basis.
Who is the paycheck budget method right for?
Personal finance is just that: Personal. As a result, there’s no single budgeting method that will work for everyone. The best strategy for any one person is the one that they’ll stick to. That being said, the paycheck budget method is ideal for people in a few specific financial situations.
People who are paid more than once per month
Budgeting is a little easier when you’re paid monthly. This is because you always know where the money for your bills will be coming from. But for those who are paid more often, there’s a little more legwork that goes into it. You have to time your expenses just right to make sure you aren’t spending money that hasn’t hit your bank account yet. You can divvy up all of your expenses to correspond with a specific paycheck.
People who live paycheck to paycheck
If you are living paycheck to paycheck, which was about 59% of Americans as of 2019, the last few months before payday can be painful. You may be scraping by on your last few dollars. Budgeting by paycheck can help you to make a plan for your income to ensure you don’t run out before payday. This budgeting method might also be what finally helps you to break the paycheck to paycheck cycle.
People who are new to budgeting
Traditional budgeting advice would have you plan out your expenses one month at a time. But what it often doesn’t account for is the fact that many people aren’t paid on the first of the month. If you’re new to budgeting, following this traditional advice may result in spending money you don’t have yet. A paycheck budget can help you get into the habit of noticing when money comes in and out of your bank account. This in turn can help you manage spending money only after you’ve earned it.
While paycheck budgeting is definitely ideal for the individuals described above, there are others who would probably do better with a different strategy. For example, if you have an irregular income, it may be a struggle to assign expenses to a specific paycheck when you don't earn a regular paycheck.
How do you get started with budgeting by paycheck?
Ready to start budgeting by paycheck? Here are the steps to follow:
1. Grab a blank calendar
You can use a calendar printable, a monthly planner, or even a digital calendar. You can also use a spreadsheet. Learn how to create your budget calendar here.
2. Add your paychecks and bills to your calendar
Add all of your paychecks to the appropriate date on the calendar, along with the specific paycheck amount. Next, add your regular monthly bills to their due date on the calendar. Regular monthly bills include your fixed expenses such as rent, insurance, debt payments, etc.
3. Tally up your total expenses
Calculate your monthly variable expenses such as groceries, eating out, gas, and entertainment. If you aren’t sure how much you normally spend, go through your last few months of bank statements and find an average.
You can also divide your variable spending up into multiple expenses. If you normally grocery shop once per week, you can add grocery spending to your calendar as a weekly expense rather than accounting for the whole month at once.
4. Include savings and sinking funds
Ideally, you’d be putting money aside each month to fund an emergency fund and also, sinking funds. There’s no specific date that you have to fund these, but choosing a consistent date can help you stick to your savings habit. You can even use an automatic transfer to really commit.
5. Assign each expense to a particular paycheck
You can use multiple highlighters to color code your calendar. Highlight each expense in the same color as the paycheck you’ll use to fund it. Keep in mind that not every expense will necessarily be paid with your most recent paycheck. Let’s say that you get paid equal amounts on the 1st and the 15th of each month, but most of your bills are due in the first half of the month. In that case, you’d probably use some of your second paycheck each month to pay bills in the first half of the following month.
How do you handle unexpected expenses?
Paycheck budgeting is a great way to get intentional about your spending and ensure that your spending aligns with your income. However, regardless of the budgeting method you choose to use, there's always the risk of having unexpected costs come up. Whether you’re paying for unplanned car repairs or a medical bill you didn’t know was coming, these emergencies are practically inevitable.
So how do you handle these unexpected costs in the paycheck budget method?
First, be sure to set aside money in an emergency fund. If you don’t already have one (preferably with 3-6 months of living expenses), then you can make room in your budget to start setting aside some money each month. Then, when those small and large emergencies pop up, you can pull from your emergency fund.
Another method to avoid an unplanned expense throwing off your budget is sinking funds. The basic premise of a sinking fund is that you take an expense that comes up irregularly and set aside money for it each month. So rather than paying for all of Christmas with your December budget, you can set aside a small amount of money each month all year long.
You can use sinking funds to save for any expense that only comes around once in a while. You can use it for annual expenses like Christmas, biannual expenses like car insurance, and irregular expenses such as car and home repairs.
The final way you can handle unplanned expenses with the paycheck budgeting method is to include a buffer in your budget. Have a set amount of money that you have as a buffer for each paycheck. If a small emergency pops up, you can use that money to cover the cost. If nothing comes up, you can set aside that money into your emergency fund.
Best tools for setting up a paycheck budget
There are tools available for just about every budgeting method you can imagine, and a paycheck budget is no exception. Let’s talk about a few tools that might be particularly useful for this type of budget:
- A monthly calendar. The entire premise of the paycheck budget method is assigning expenses to a specific paycheck based on the date they come out of your bank account. Because of that, a calendar lends itself particularly well to this type of budget. You can use color-coding to make this method especially easy to keep track of.
- Budget templates. There’s no shortage of budgeting templates and printables available these days. There are several free and paid options on the market that are specifically designed to help a certain type of budgeter.
- A budgeting app. If you prefer digital tools, a budgeting app might be the right choice for you. There are many apps that lend themselves especially well to the paycheck budgeting method. You can find them by doing a search in your phone's app store filtered by best reviews. Some great ones include YNAB (You Need a Budget) and the Every Dollar app.
The bottom line
The paycheck budgeting method is an easy system to start with. It is also an effective way to be intentional about where your money is going. For anyone who lives paycheck to paycheck or struggles with spending money before you’ve earned it, this is a great strategy to help you get back on track!