Takeaways
- The paycheck budgeting method allows you to refine your spending habits over time.
- Creating a paycheck budget is fast and easy, which improves budget adherence.
- Combining budgeting methods with the paycheck method can accelerate your success.
- Determining the best allocation of savings and spending depends on your financial goals.
- The paycheck budgeting method can help you meet your financial goals quickly.
Tons of budgeting strategies can help you get your finances on track. The method that works for one person may not work for the next because different lifestyles, views on money, income levels, and debt all factor into what approach makes the most sense to you.
Personal finance experts agree, however, that picking a budgeting strategy is critical for your financial journey. Whether it is the 50/30/20 method, zero-based budgeting, passion budgeting, or the cash envelop method (more on these later), the fact that you choose, implement, and stick to a budget will help you increase your financial health.
Most Households Don’t Stick to a Budget
Are you getting squeezed by inflation and financial uncertainty? You are not alone. According to a 2023 survey, 58% of Americans live paycheck to paycheck[1].
Budgeting isn’t a one-size-fits-all method, but exploring and sticking with a budget can improve your finances, revealing blind spots and money habits you may not have otherwise noticed. If other budgeting methods just haven’t been quite right for you, one method that could work well is the paycheck budgeting method.
What is Paycheck Budgeting?
The paycheck budgeting system analyzes your paychecks and assigns each to a series of expenses. The paycheck budgeting system can work for you, even if you have irregular income. It is all about timing when cash comes into your accounts and allocating expenses in your budget until the next paycheck arrives.
The paycheck budgeting method can combine multiple budgeting systems, like the zero-based or passion budget, to create a custom approach that works for you.
How Paycheck Budgeting Works
Implementing the paycheck budgeting system is relatively fun and easy. Here are five basic steps to get started using the paycheck budgeting system:
Step 1: Review Your Expenses
Before diving into the paycheck budgeting system, the first step is to review your expenses. Look at the past 2-3 months of bank and credit card statements to see how you are spending.
Track your expenses and write down when you spend money throughout the month, whether on fixed or variable costs. These expenses could include rent, utilities, insurance, car notes, or credit card payments.
Smart Tip:
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No matter how big your paycheck is, you don’t want to be in a situation where you spend more than you make. If you are, you need to cut expenses or earn more income.
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Step 2: Map Out Your Month
Now that you understand how much you are spending and where critical expenses lay on the calendar, you can start mapping expenses. It might sound old-fashioned, but pull out a calendar (printed or on a spreadsheet) and write down bill due dates on your calendar. Write down when you receive your paychecks to give you a visual pulse on your monthly cash inflows and outflows.
Don’t forget to write down dates that may require additional expenses like holidays, birthdays, or travel dates. These might require careful planning.
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While you can’t plan for unscheduled expenses, you can allocate savings to your emergency fund account when unexpected expenses arise.
Step 3: Budget Each Paycheck
With all your key expenses mapped on your calendar, overlayed with when you are getting paid, you can now create a budget for each paycheck.
Now you can combine the paycheck method with another budgeting method, like the zero-based budgeting strategy. In the zero-based budgeting system, your income minus expenses equals zero, and you budget your entire paycheck. For example, if you make $1,500 twice a month, you might pay $1,000 on rent and $500 on other expenses. With your second paycheck, you can split the $1,500 among personal expenses and savings goals.
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Step 4: Allocate Appropriately
With an idea of your spending categories, how much you earn per paycheck, timing of paychecks, and critical time points on your calendar for expected expenses, you must decide how much to allocate to expense categories.
Unlike other budgeting strategies, the paycheck budgeting method does not offer prescribed percentages for you to spend on expense categories. This is where you can combine the paycheck budgeting systems with a strategy like the 50/30/20 budget, which advocates spending 50% on necessary expenses, 30% on personal expenses, and 20% on saving and investing.
Defining your financial goals before you start budgeting can help this process immensely. What do you want to accomplish with your budget?
Want to save more? Budget for an emergency fund. Want to pay off your student loans? Allocate a portion of your paycheck to reduce debt. Want to start investing? Step up an online brokerage account and start trading stocks.
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It’s your money and your life. Where your money goes is completely up to you.
Step 5: Monitor and Review
Once your paycheck budgeting system is in place, monitor your progress. Set up quarterly reviews to track your progress. Play with your expense category allocations until you find a suitable arrangement that works for your lifestyle.
Sticking to a budget can be difficult. Luckily, the paycheck method feedback cycle is short. You will know how well you are doing each paycheck. Are you overspending?
Smart Tip:
The key to making the paycheck method work is to ensure that your large and fixed costs, like your rent or mortgage, are covered by one paycheck. If your fixed costs are too high for one paycheck, plan accordingly.
Pros of Paycheck Budgeting
Easy to Start: Paycheck budgeting is super simple to implement. If you have a pencil and calendar, you can build a paycheck budget in minutes.
Expense Awareness: Being aware of how much money is flowing in and out of your bank accounts will educate you on where your money is going. This may cause you to spend less and save more. There may be expenses or subscriptions you are paying for that you didn’t even know you were paying for. The paycheck method helps you cut down on expenses.
Cons of Paycheck Budgeting
No Allocation Strategy: Most people look to get their finances on track with an “all in one” solution. The paycheck method, while effective for managing your day-to-day spending, lacks clear guidelines for how much you should spend in expense categories – going out, fun, groceries, rent, etc. This subjectivity might not be what you want when budgeting for the first time.
Lack of Long-Term Planning: While you can certainly use the paycheck method to get yourself out of a financial pickle, like spending more than you make, it emphasizes more short-term thinking. The paycheck method keeps your thoughts on every paycheck. For larger goals, like saving for a down payment on a house, it could be better to switch to a budgeting strategy that is higher level and saving goal-oriented, like the pay-yourself-first budget.
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Smart Tip:
Not sure you want to budget on your own? Perhaps you could benefit from talking with a financial advisor.
Smart Summary
Now that you know the paycheck budgeting method, you can determine if it’s right for you. Here’s the deal. Not all budgeting strategies will work for you. Explore and give budgeting strategies a shot to see what works for you. Budgeting strategies range from the incredibly complex to the most basic structures. Figure out what works for you and try to create smart money habits.
Frequently Asked Questions
There is no one-size-fits-all budgeting solution. The fact that you are learning to budget is a step in the right direction. Budgeting can change your financial outlook, so choose a method that works for your finances.
Yes and no. The paycheck method doesn’t explicitly set savings goals. However, you can adopt savings targets that personal finance experts recommend, which is between 10-30% of your after-tax paycheck, and incorporate those into your monthly budget.
Yes. Budgeting will help you increase your net worth. By budgeting appropriately, you will pay off your debt, increase savings, and start investing. All these financial decisions will enhance your net worth and financial health. Budgeting is always a smart money move.
[1] CNBC. With inflation stubbornly high, 58% of Americans are living paycheck to paycheck. Last accessed August 30, 2023.
