How to Budget by Paycheck
Today I want to talk about budgeting. If you’ve tried budgeting before, you probably used something that looked like this
If you struggled with it, it likely didn’t work because life never turns out exactly like it’s supposed to. If you go over in one place you’re not sure how that affects everything else, and you’re left confused. Maybe an overage in one category makes you feel like you’ve already blown it, and then you throw in the towel on the whole thing. Maybe your car needs an expensive repair, and since that’s not on the budget anywhere it throws the whole thing off and you end up using a credit card to pay for it, even though you don’t want to.
My method of budgeting is different. Instead of budgeting by month, I budget by paycheck. We do this by first splitting your expenses into three different categories that we treat differently. The categories are fixed and recurring expenses, day to day spending, and non-recurring or random expenses.
Fixed expenses are things like rent, utilities, subscriptions, etc. We organize them in due date order, and pay them when we receive that paycheck.
Day to day spending is things like groceries, eating out, hitting the vending machine, or buying a soda at the gas station. We calculate how much you’re spending on average per pay period for all of these things, and take that amount out in cash on payday. You don’t have to track where any of this money goes, but when it’s gone it’s gone.
Non-recurring and random expenses include things that don’t happen every month, but you know will happen eventually. These include car and home repairs, clothes shopping, and gift buying. We calculate how much you spend on these every year, divide the amount by 12, and put that much into a separate high interest and low fee savings account every month that lets you name your accounts.
The savings accounts end up looking like this:
We pay fixed expenses on pay day to help you see your fixed expenses by payday and not per month, and it makes paying bills much simpler.
Day to day spending gets taken out in cash on payday so you have nothing to track, it turns a little here and a little there into a fixed expense, and because paying with cash is awkward it might mean you end up spending less money than you would have if you were putting it on a credit card.
We save for non-recurring expenses in savings accounts so it gets the money out of your checking account, and it ensures you’re saving for them. When you need the money you know how much you have to spend, and it makes it easier to stick to the plan. I have definitely struggled in the past with spending more money on clothes than I should have.
Now when you get paid, you pay your fixed expenses, take out cash for day to day spending, save for upcoming expenses, and you actually have money left over to reach your other goals! We use Excel to pull it all together, and it starts to look like this:
This makes it super easy to see the effect of any changes that occur, and it’s a great planning tool.
If you see that you have extra money, and you decide that you want to pay off your credit card for $700, you can see how that would affect you.
You can see that while it would be OK for this pay period, 2 weeks from now you would go negative, and again 4 weeks from now.
Knowing how it will affect you, you can then make the decision to figure out how much you can afford to pay on it.
If paying off your credit card is your main goal, then you can see that you can make an extra $450 payment on it and still be OK moving forward. As you find out the actual numbers for each income and expense, you adjust the budget to reflect them.
Budgeting this way will take some getting used to, but I know you can do it. Here are some best practices to make sure you’re getting the most out of this method.
Overestimate your bills. This way nothing is ever unexpected, and that extra credit card payment you made won’t mean you can’t pay your electric bill. If your electric bill can range from $100 to $150, estimate that it will cost you $150. That way when it comes in at $130 you will have found an extra $20 to put towards your goal.
Set goals for your extra money. Whenever you do find it, you need to know where to put it. Focus on one goal at a time, and once that’s knocked out you can focus on the next one. This will help you reach all of your goals faster than trying to reach many at the same time, and all the individual wins along the way will keep you motivated to reach the next one. If you don’t intentionally set a goal for it, you’re much more likely to spend it at Target.
Extend your budget for at least three months. This will help you see the long term effect of your decisions, and help you see everything you have coming up. If you know that a birthday or holiday is coming up, you’ll be much less likely to take money out of your gift savings account for something else.
Avoid changing your budget after the month has begun. By separating your expenses into different categories, treating them all differently, and overestimating your bills, you should have few if any surprises. Don’t take out more cash because you ran out, or swipe your card on things you know you shouldn’t be buying. If after a couple of months you decide that you need to take out more cash each payday you can, but make sure you change your budget to reflect that, and decide which goal you’re willing to delay in order to do that. You want to be realistic about your spending without giving yourself too much leeway to slip back into old habits.
I work with my clients to help create this budget when they sign up for a coaching package. Want to learn more about coaching? Schedule a Q&A session today!