You might be wondering “What Is Paycheck Budgeting?”, Paycheck Budgeting is the process of creating a budget every time you get paid.
For most workers this is either biweekly, weekly, or monthly. It is a fantastic tool to discover how you use your finances and what triggers you to spend money.
You could say that it’s a quest towards financial self-discovery!
For example, if you get paid twice a week, you’ll have one budget to cover expenses for early in the week and a separate budget which will be dedicated to expenses towards the end of the week.
It can be tweaked to your wants, your needs and what works for you and your loved ones.
Is Paycheck Budgeting Right for me?
Like I mentioned earlier, Paycheck Budgeting is very personal and there is no best strategy for budgeting that works for everybody.
Using Paycheck Budgeting is a great way to manage money and begin learning healthy financial habits.
It gives you a better understanding of where your money is going.
It also avoids Overdraft fees from your bank and keeps you from running out of money before your next payday.
If you have an idea which expenses are going out of each paycheck, it gets a lot easier to make sure you aren’t spending money that you don’t have.
On the other hand, there are certain groups of people that would benefit from Budgeting by Paycheck:
If you live Paycheck to Paycheck
According to CNBC, 58% of Americans are living paycheck to paycheck — including 30% of those earning $250,000 or more.
If you do live paycheck to paycheck, the final few days before the end of the month can be painful.
You may be getting by on your last few dollars aching for payday to arrive and you find yourself in the same position the last few days of the next month?
Paycheck Budgeting can help you devise a plan to ensure you are not scraping by just before payday.
It will also start the journey of helping you break out of the paycheck-to-paycheck cycle.
If you are new to Budgeting
Paycheck Budgeting is not only for people that live paycheck to paycheck, but it can also be a beneficial tool if you are new to budgeting in general.
It can act as a guide to help you get into the habit of noticing the money that flows in and out of your bank account.
If you are new to budgeting, typical budgeting advice would tell you to plan out your expenses on the 1st of every month.
What this doesn’t account for is the fact that many people are not paid on the 1st of every month, it also doesn’t account for unexpected expenses.
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So How Do I Get Started?
Let me start off with a story
When I first started budgeting, I set my entertainment budget at $250 a month when realistically it was closer to around $400.
I had set myself up for failure before I could even start, that’s because I wasn’t truthfully keeping track of every dollar I was spending.
But enough about me! Let me share the process I used to Budget by Paycheck:
Grab A Monthly Planner
You can use a blank monthly planner, a digital calendar or even a google spreadsheet. You can find my favourite
Add in your paychecks and expenses to your planner
Add in all your paychecks to the relevant date on your planner along with the amount you will be receiving.
Afterwards, add in all your fixed expenses to the date that they are due on your calendar, these include expenses like rent, credit card payments, subscriptions, etc.
Calculate your variable expenses
Calculate your variable expenses such as entertainment, food and if you have kids calculate their expenses as well.
A neat trick I would use is I would go through the last three months of my bank statement and note down every dollar I’d spent on variable expenses and calculate an average.
Don’t forget to include your savings!
In a perfect world, you would be putting some money aside each month as savings.
I had a specific date that I would put money into my savings and treated it like an expense.
Once I got into the habit of doing this, I automated this process and it got easier.
Review your Budget
Having a thorough review done and seeing where your money went compared the amount you put into your planner is vital.
Aim to close out your budget if everything is in the right place then good job! You’re one step closer to reaching your financial goals.
If they aren’t in the right place, don’t knock yourself down! It just means that there are a few more hard truths you need to face about your spending habits.
Go through your Planner and see what you got wrong and correct it for the next month, eventually you will see improvements.
Remember, It’s a Marathon, not a Race.
Get a head start with the Financially Fabulous Budget Planner. Everything you need to make every month a budgeting success. Click to find out more.
What about Unexpected Expenses?
Whichever budgeting method you choose, there are always going to be unexpected expenses that show up.
Maybe you fall sick and there is a medical bill that needs paying, maybe some house repairs that you just cannot avoid.
These things are inevitable and a part of life.
Sinking Funds worked wonders for me!
You can use Sinking Funds to save for expenses that happen only occasionally like Easter, Christmas, Car repairs etc.
Another great but simple way to plan for unexpected expenses is to just include a small buffer in your budget.
If an emergency arises, you can use that buffer to pay for it, if nothing happens, you can set that money aside either into your sinking fund or your emergency fund.
Figure Out Which Expenses Will Be Covered By Which Paycheck
After you have noted down all your expenses, you should have a pretty good idea of your expenses for the week/month.
In some instances, you might have to set aside cash from multiple paychecks to cover big expenses like mortgage payments or rent.
When using your monthly planner, assign each paycheck a different color, then highlight your expenses and spending that will be with by each paycheck the same color.
Breaking up a Paycheck: 50/30/20
I’m sure you’ve heard of the popular 50/30/20 rule, and it applies for when you want to allocate your paycheck as well:
Essentials at about 50%
Try to keep your essentials, like rent, groceries, credit card repayments at around 50% of your before tax paycheck.
If you can, remove this money from your account right away, so you can have the peace of mind of knowing no matter what that your needs will be taken care of.
Obviously, depending on the size of your paycheck as well as what city you live in you might have to allocate a slightly higher or lower percentage of your paycheck.
Adjust accordingly but a general rule of thumb is that 50% is the sweet spot.
Savings and Goal Money at around 20%
Ideally, this would be the portion of your paycheck you set aside for savings or for investments and other medium term financial goals you may have.
You would want to put about half of this towards your savings or retirement plan, this could help set you up and help you meet your long-term goals.
You can put the other half towards your goals.
Depending on your circumstances how you use this portion can change over time.
You would firstly want to use it to build an emergency fund, if life decides to give you a bad hand at any point you can be financially prepared.
You can also use it to meet your investment goals, maybe you’ve always wanted to invest in the stock market, real estate or even invest into starting a side business of your own.
Use The Final 30% As You Please
Surprised? This could help you create a better relationship with money.
Adjusting your priorities so that you save money first and then spend whatever you have left without any worries helps us use our money guilt free.
If you’re worried that you’ll still go over the limit when you can go out to eat and shop again, try using a cash only approach.
Ditch your Debit/Credit cards for a while, these make us seem like the money we are spending is abstract.
It doesn’t allow us to truly get a grasp on the money flowing in and out of our accounts.
If you feel like you’re not getting ahead remember:
Not getting ahead, but at the same time not falling behind, is still progress.
Can Paycheck Budgeting Work For You?
Paycheck Budgeting is a great strategy regardless of your annual income.
If you are someone who lives paycheck to paycheck, finds it hard to save money, or you want to have a better idea of where your money is going then Paycheck Budgeting will probably work for you!
Enjoy the journey while on the path towards your destination!
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Last Updated on 15th August 2022 by Emma