Master your finances and learn how to budget with ease.
What is the budget-by-paycheck method, and does it actually work?
We will dive deep into this budgeting method in this blog post!
You can use plenty of budgeting methods to take control of your finances.
But all these different options might leave you wondering which is best for me.
This is a great budgeting option if you get paid more than once a month or live paycheck to paycheck.
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What Does It Mean To Budget By Paycheck?
Budgeting by paycheck is very different from traditional monthly budgeting.
Rather than creating a budget for the entire month ahead, you will create a new budget for each paycheck cycle.
While this might be more work throughout the month, it gives you better control over your money, makes it easier to deal with unexpected expenses, and helps to avoid budgeting errors.
Is It Better To Budget By Paycheck Or Monthly?
Monthly Budgeting creates a few challenges if you are paid more than once a month and live paycheck to paycheck.
For one, when you create a monthly budget, you’re budgeting for an entire month’s expenses.
This means that if you come up short, or if something unexpected pops up, you risk falling behind or dipping into your emergency fund to get by until the end of the month.
Another challenge monthly budgeting presents is that it does not factor in periods where large sums of money might leave your account simultaneously.
For example, many people pay their mortgage, car insurance, and phone bill all in one day because of how the company has recurring payments set up.
Finally, your monthly income will vary unless you’re a salaried employee.
For example, your company cut down on hours one week, or you took an unexpected sick day. This will impact your monthly budget significantly.
If you can budget by paycheck, you will have a much more accurate budget that reflects an irregular income (which many people have).
If you currently live paycheck to paycheck, then budgeting by paycheck will be a much better option.
How To Budget By Paycheck
Step #1 – Choose Your Budgeting Tool
The first step to budgeting by paycheck is to choose what tool you want to use to create your budget and track your spending.
Some options you can use include:
- Monthly Calendar
- Budgeting App
- Budget Planner
- Budget Worksheets
There is no “best” tool to use. The choice is yours!
Step #2 – Map Out Your Fixed Expenses
Once you have picked out the tool you want to use, it is time to map out your fixed monthly bills. Some examples include:
- Mortgage Payments
- Car Payments
- Utility Bills
- Insurance (Health Insurance, Automobile Insurance, etc.)
- Loan Repayment (Student Loans, Personal Loans, etc.)
- Credit Card Debt
Pull the last three statements from your bank account and highlight every payment that is the same.
Then, write down the due dates and total for each fixed expense.
Tip – If you notice you have several large payments that all happen at the same time every month, it might be worth contacting a couple of companies to see if they can move the payment to a different time of the month.
Doing this will help you spread out expenses across your paychecks.
Step #3 – Create Your Paycheck Budget
Once you know your paycheck and expenses, you can create your budget.
- Start by inputting your income.
- The next step is deducting the fixed expenses you must pay during this pay period.
- Then you can deduct how much you need to pay towards your debt, savings account, emergency fund, sinking funds, retirement plan, etc.
- Finally, you can take whatever is left to divvy up amongst your variable expenses. This includes things like food, gas, entertainment, etc.
As you can see, this budgeting style leaves less room for error since you are budgeting at a more granular level.
Step #4 – Tracking Your Money
Once you’ve created your paycheck budget, it’s about tracking your money.
Doing this will help you stick to your budget and make any necessary adjustments as needed.
Tips You Can Use If You Struggle To Stick To Your Budget
Most people struggle with sticking to their budget for variable expenses. It’s far too easy to go over budget in these areas.
So, here are some tips you can use to help stay on budget:
1. Track Your Spending Daily
Tracking your spending daily keeps your financial compass sharp.
It helps you know exactly where your money is going, identify any spending patterns or surprises and avoid impulse buys.
You can also build discipline and develop better money habits over time.
To help you track your spending, especially if you’re using mostly cash, you can use the cash envelope system.
This is a method where you use physical envelopes to manage your spending. Here’s how it works:
- Decide your spending categories (like groceries, dining out, etc.).
- Set a budget for each category.
- Label envelopes with category names.
- Take out cash for each category from your bank.
- Put the cash into the corresponding envelopes.
- Spend from the envelopes, but once the cash is gone, you can’t spend more in that category until the next budgeting period.
It’s a simple way to control spending, especially if you tend to overspend with credit cards. However, it might not be as convenient for online purchases or earning credit card rewards.
If you’re looking for a ready-made cash envelope system, here are two options:
2. Create A Meal Plan
A meal plan is like a food schedule that helps you decide in advance what you’re going to eat for breakfast, lunch, and dinner.
It’s a plan that makes grocery shopping and cooking easier because you already know what ingredients you need and what meals you’ll prepare.
What I love about meal planning is that it can also help you eat healthier and save money by avoiding last-minute takeout or unhealthy snacks.
If you’re looking for a ready-made meal planning template, here’s a meal planner spreadsheet.
If a printable PDF version is a better fit, here’s a printable meal planner that’s editable in PDF.
3. Find Free Activities
There are many free activities you can participate in to save money and decrease your variable expenses.
Some examples include going on a hike, renting a book or movie from the library, attending free local festivals or volunteering.
Here’s a list of free activities to do with friends on the weekends.
4. Do A No Spend Challenge
A no spend challenge is a period where you commit to not spending money on non-essential items or activities.
It’s important because it helps you save money, increase awareness of your spending habits, break impulse buying and foster discipline.
If you want to try a no spend challenge, here’s a no spend challenge guide with everything you need to know.
If you still need help sticking to your budget, consider re-evaluating your expenses and what percentage they take out of your income.
If your cost of living is higher than your income, you must find ways to reduce your expenses.
This might involve finding a cheaper place to live, cutting back on unnecessary purchases, or even getting a second job.
When living paycheck to paycheck, a good percentage breakdown of your expenses is the 50/30/20 rule.
What Is The 50/30/20 Rule Of Money?
This budgeting method has you break up your budget into three simple parts:
50% of Your Paycheck Goes To Needs.
Your needs include rent, utilities, transportation, food, and debt repayment (credit card payments).
30% Of Your Paycheck Goes To Wants.
This budgeting category includes entertainment, clothing, dining out, and vacations.
20% Of Your Paycheck Goes Towards Savings & Investments.
This budget category should consist of your emergency fund, retirement accounts, investments, and any other savings you may want to do.
What Is Zero-Based Budgeting?
Another budgeting method that can be good is the zero-based budgeting method, which means every dollar gets allocated to one area of your budget whether it’s your savings, expenses or debt.
The end result is that your final balance will always return to zero.
Many financial experts agree this is the best way to understand where every dollar goes.
The Importance Of Setting Financial Goals
As Dave Ramsey says, “You must gain control over your money, or the lack of it will forever control you.”
Apart from budgeting, one of the best ways to do this is to set financial goals for yourself.
In fact, these two things go together like peanut butter and jelly.
Setting short-term and long-term goals will help you focus on how you want to use your money within your budget to reach those goals faster.
For example, budgeting a certain percentage of each paycheck towards debt repayment would be a great goal if you’re trying to pay off debt.
The same example will apply if you’re trying to save up for a down payment for a house.
Take time to think about your money goals, so you can factor them into your budget.
How To Handle Unexpected Expenses
Unexpected expenses are inevitable, unfortunately.
They can come from medical bills, home repairs, or car problems.
So, how do you handle these expenses when you’re budgeting paycheck to paycheck?
Here are three solutions that work well.
Build An Emergency Fund
Setting up an emergency fund is the number one way to budget for unexpected expenses.
A good starting point is to have at least $1000 set aside.
You can grow your emergency fund from there.
An ideal goal to reach would be to have 3–6 months of expenses saved up in your emergency fund.
If you’re looking for a fun way to track your emergency fund deposits, here’s a printable emergency fund tracker.
Most adults have regular yearly costs that aren’t paid on each paycheck.
Some examples include annual car insurance payments, property taxes, school fees, Christmas, etc.
An excellent way to budget for these expenses is to set up sinking funds, which is when you set aside to pay that expense when it comes.
Leave A Buffer In Your Budget
Lastly, it can be worthwhile to leave a buffer in your budget.
And this doesn’t need to be a significant amount.
Even leaving $50 or $100 of your paycheck can give you some wiggle room for a small, unexpected expense.
So, if you’re ready to take back control over your personal finance and reach your financial goals while living paycheck to paycheck, I hope this guide on how to budget by paycheck has been helpful.
It’s also worth remembering that just because you live paycheck to paycheck doesn’t mean you can’t accomplish your goals or improve your financial situation.
You will find that budgeting on a more granular level like this will give you more control to achieve your goals!
Related Articles on How to Budget By Paycheck:
- The Ultimate Budget Categories and Subcategories List
- Best Personal Finance Books: The Must-Reads About Managing Money
- Budgeting Tips for Beginners: How to Easily Start a Budget
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