Many people want to know how to budget by paycheck. There are lots of ways to do it and it’s not much different than a general budget. It takes some intentionality and follow-through, but it’s not particularly difficult.
Why Budget by Paycheck?
Creating a budget by paycheck is a nice, clean way to budget. Especially if paychecks are regular, consistent, and predictable. Once it’s setup, it doesn’t have to be adjusted again until there’s a change like an increase or decrease in your paycheck.
Budgeting by paycheck, especially if it’s automated, is also a good way to ensure that the budget will be followed. It cuts out some of the ambiguity and uncertainty of a less structured budgeting system.
Before You Budget by Paycheck
Before we get too much into how to budget by paycheck, it’s important to address some of the steps that come before the actual budget. You’re going to want to be clear on your goals, values, and why you’re creating a budget by paycheck in the first place. Some questions to ask yourself:
- What are my goals and values?
- How can a budget help me?
- Is there a better way to budget?
- Do I have consistent income that makes budgeting in this manner an effective strategy?
Related:
- How Value-Based Spending Can Change Your Life
- It’s Ok to Change Your Personal Finance Goals
- Crushing Your Long-Term Financial Goals
Creating a budget just to create one isn’t going to work. There has to be a why or reason behind it. Once you understand those reasons, you’ll be much more likely to succeed.
How to Budget by Paycheck
How to budget by paycheck will be the topic of the remainder of this post. Although there are many ways to do it, I’ll outline the steps that will give you a high chance of success.
Number 1: Pay Yourself First/Automate Your Money
Whether it’s a budget by paycheck or any other type of budget, the first thing that should be done is to pay yourself first via automation. There are two key areas you want to pay yourself first in–an emergency fund and investments. I also like to pay myself first in other areas like a vacation fund and a fun account, but those are optional.
It doesn’t matter if you get paid by the month, bi-monthly, or weekly. Decide how much you want to invest and how much should be allocated to your emergency fund.
Let’s use a two income household making $10,000 per month as an example. If this family wants to invest 20 percent and save $500 per month for emergencies, they would have the following allocations, depending on how often they are paid.
- Paid by the month, contribute $2,000 every paycheck into investments and $500 into an emergency fund
- Paid every two weeks, contribute $1,000 every paycheck into investments and $250 into an emergency fund. Or get creative and use the first paycheck of the month to pay yourself first and the second paycheck for monthly expenses like rent/mortgage, food, groceries, etc.
Either way works. It doesn’t matter what the system is as long as you consistently follow it.
Number 2: Look at Your Pay Period
We touched on this in the last section, but it’s worth going into more detail here. Develop a system to budget by paycheck based on the time of the month you get paid. That means developing a time to pay yourself first, pay your bills, schedule credit card payments, etc.
Whatever system you develop, make sure it works for your individual situation. It doesn’t matter if you’re paid once a month, twice, or weekly–a good system will cover whatever your situation is.
Number 3: Plan for the Expected Expenses
When setting up your budget, make sure to account for everything. That includes health and car insurance, student loans, monthly payments to service providers, etc. A majority of expenses are predictable which is advantageous in the sense that it gives you the opportunity to prepare.
For example, if you have student loan payments of $350 per month, you know that bill is coming month after month until it’s paid off. Same with someone with a mortgage of $3,200-that expense is coming every single month and can be planned for.
As a bonus, here’s a tip to reduce or even eliminate your expected expenses. Pick out something in your budget that you can improve on. For example, electricity costs are expensive where I live in California. I added solar to my house to significantly cut down that bill. I’m also in the process of adding more solar panels to almost eliminate the bill entirely.
So even though I have a good system to pay the electricity bill and can afford it, it’s even more powerful to minimize or eliminate that bill. That frees up more money for saving and investing, which are in alignment with my long-term goals.
Number 4: Account for the Unexpected
The fourth way how to budget by paycheck is to account for the unexpected. It doesn’t matter how much you make or how often you get paid, unexpected expenses are always going to come up.
For the really big things, that money will come from an emergency account (contributing to those funds is already embedded in the monthly budget). There are also smaller things that will come up that you don’t want to have to pull from the emergency account.
Oil changes for the car, a larger grocery bill than expected, a more expensive dinner than you planned for, etc. are all examples of these types of items. That’s why it’s important to have a little cushion in the budget to deal with them.
Don’t make things so tight that one little variation in the monthly budget throws the whole thing off.
Number 5: Enjoy Your Life and Don’t Fret
The fifth and final tip is to enjoy your life and don’t fret. Remember, there’s no “until” or “when.” For example, statements like this:
- “When such and such happens, I’ll be happy.”
- “I can’t wait until X happens and things will be good.”
- “If only I had X number of dollars I wouldn’t have to worry anymore.”
Do your best to plan and prepare for the future. That’s all you can do. There is no sense in worrying or having grandiose visions of when such and such happens you’ll be good.
Conclusion
There are many different ways to budget, doing it by paycheck is just one method. For many people budgeting by paycheck make sense because it naturally aligns with the money they have coming in. That makes it easy to reconcile and understand.
To review, these are the five tips to start with:
- Pay Yourself First/Automate Your Money
- Look at Your Pay Period
- Plan for the Expected Expenses
- Account for the Unexpected
- Enjoy Your Life and Don’t Fret
Do you budget by paycheck or do you have another method? Tell me in the comments!
