Much of the conventional advice for creating a budget is based on managing your money for the entire month. But unless you’re paid monthly on the first, you may find it challenging to plan your spending around money that hasn’t hit your account yet.
Whether you’re living payday to payday or you just want to keep better track of how each paycheck is spent, the paycheck budget may be right for you.
Paycheck budgeting is pretty much exactly how it sounds. You create a budget for each time you get paid, allocating every dollar from each paycheck to bills, expenses and savings.
When you base your spending on the money you actually receive instead of your total monthly income, you can avoid prematurely spending cash you won’t receive until later in the month. It’s not helpful knowing you have a $400 monthly food budget when in reality you can only spend about $200 each two-week pay period without overdrafting.
With the paycheck budget method, you’ll form each budget based on what bills fall in that pay period and what other spending you’ll do before the next payday.
Schedule bill payments right after your paycheck hits your account, so that you know the remaining money is free for variable expenses (like groceries and gas), savings or extra debt payments.
While paycheck budgeting gives you a better idea of how much discretionary money you have between paydays, you’ll want to make sure you’re not frivolously spending that “extra” cash.
Examine where you stand with your short- and long-term goals. Can you allocate more money to pay down student loans? Do you want to add more to your vacation fund? Could you increase your 401(k) contribution?
Having a certain percentage of each paycheck automatically diverted to a savings or investment account can help you meet your financial goals without having to do the work of transferring the money manually.
One downside to the paycheck budget method is that your bills and expenses may not be uniform for each pay period. But there are a couple workarounds to this issue.
If the bulk of your bills are due around the same time each month, you can call your service providers and request to change your bills’ due dates. Credit card, utility, internet and phone companies have been known to be flexible with adjusting payment dates — especially if you have positive standing as a customer. (Your landlord, on the other hand, may not budge.)
Another way to make up for an imbalance of expenses is to set aside some money in a sinking fund during pay periods when you’ve got extra money on hand. Use that money to supplement bill payments and essentials during lean pay periods.
The half payment budgeting system can also help even out your bills by splitting your fixed bills in two so you’re spending the same amount of money on bills with each paycheck.
Budgeting is not a one-size-fits-all endeavor, so use whatever method works best for you — or create your own.
Kumiko Love, creator of The Budget Mom, failed several times managing her money in the past because she was trying to conform to the monthly format of budgeting lauded by personal finance experts.
“Every single month I was running out of money by the end of the month, and I couldn’t figure out why,” she said. “I knew I had extra money in my budget, but where was it going?”
It wasn’t until Love started creating a budget for each individual paycheck — and combined that with calendar budgeting and the cash envelope system — that she found success.
Creating one budget per month, or making half bill payments, or using sinking funds are suggestions, not rules.
Nicole Dow is a senior writer at Codetic.