We’ve all heard of living paycheck to paycheck…but what about budgeting from paycheck to paycheck? Budget by Paycheck may not be talked about as often as some of the more popular budgeting plans, but it might be the perfect method for you.
Today we are going to talk all about the Budget by Paycheck method…the basics, pros and cons, and how to set one up. Keep reading to learn all about this budgeting system to see if it is the right fit for your situation.
Do I need a budget?
No matter your income, a budget is an important tool that will reduce stress in your day-to-day living and help you reach financial goals.
When money is tight, budgeting is a way to keep your spending under control and eliminate debt by living within your means.
Budgets are even important when you have more money coming in than you need.
By establishing a budget, you will eliminate unnecessary spending and be able to work towards financial goals like becoming debt free, saving for college or retirement, or even fun goals like purchasing a vacation house.
What is the Budget by Paycheck Method?
The Budget by Paycheck method is a budget that is created based on your take-home amount each paycheck.
Unlike a typical monthly budget where you plan for all of your expenses and income for the entire month, when you Budget by Paycheck you focus on your incoming and outgoing money for that pay period.
If you are paid every other week, then you will budget for two weeks at a time. This may include scheduling your re-occurring bills so that they are spread out more equally between your pay periods.
The Budget by Paycheck method is a type of zero-based budget. This type of budget assigns a job for every penny that you bring home.
You start with your take-home pay, and then subtract every expense (including savings and investments) until you have zero dollars left.
You will need to get very specific with how your money will be spent each month and include line items like “gifts” and “entertainment.”
One major benefit of a zero-based budget is that you will know that every penny you bring in will be used according to your plan.
In a nutshell, the Budget by Paycheck method is a zero-based budget that divides your income and expenses according to your paychecks.
Budgeting by Paycheck is helpful for several reasons:
- It allows for closer monitoring: A monthly or yearly budget can be more difficult to track. A paycheck budget has you regularly checking in on your income and outgoing expenses.
- It is flexible: This type of budget is helpful when you have unexpected expenses or extra income. Since you are working with a shorter timeline for your budget, you can pivot more quickly to recover or reassess.
- It doesn’t allow you to go off track as easily: After you’ve established your Budget by Paycheck, you should be doing at least a quick review each time you are paid. This close monitoring means that you have less time to stray too far from your budgeted amounts or financial goals.
The budget by paycheck system also has some challenging aspects including:
- Upfront Work: The budget-by-paycheck system will require a fair amount of work to set up. Besides the usual budgeting tasks of writing down bills and expenses, you also have to decide how to distribute them between your two (or more) paycheck amounts. This could require changing billing dates with companies.
- Frequent monitoring: A healthy budget is reviewed regularly. With a Budget by Paycheck, you should be reviewing how you did and planning for the next budget period each time you are paid. This could be as often as weekly.
Who should use Budget by Paycheck?
Each type of budgeting has its benefits and drawbacks, so it is important to consider the system that will work best for you!
Budget by Paycheck is a wonderful choice for:
Beginning budgeters– Even though it requires more upfront work, a Budget by Paycheck will help a budgeting newbie monitor spending in manageable bite-sized pieces.
People who want to keep tight reins on their spending- If you’ve had a hard time staying on track with a longer term monthly budget, a Budget by Paycheck will eliminate many of your issues.
Since you will be checking in on your budget more often you will have the ability to see when you are heading in the wrong direction right away and pivot to correct the problem.
Type A Personalities- A budget by paycheck is a great fit for very organized and analytical personalities.
What other budgeting systems are available?
Besides Budget by Paycheck, there are other budgeting systems to consider including:
Using the 50/30/20 budget you will designate 50% of your take-home pay for necessities like house payments, groceries and utilities, 30% for wants, and 20% for savings and/or debt repayment.
This budget is less restrictive since you simply keep spending within your pre-established percentage and don’t have to plan out every single expense.
In the envelope system of budgeting, your take-home pay is cashed out, and placed into different envelopes each assigned to a different budget category.
You can only spend the money in each envelope during your time period, so once the money is out for a particular category, spending is done!
This budget system is very tactile and easy to follow. It can also be used in combination with other budgeting systems.
In our house, we use a zero-balance budget combined with a modified version of the envelope system called the cash wallet system.
The envelope system of budgeting can be done digitally (using savings accounts and debit cards), however, there is something to be said about using actual cash and envelopes.
This helps you visualize your spending which can be especially helpful if you are new to budgeting.
Pay Yourself First (80/20 Budget)
This budgeting method works in the reverse of most other systems. With Pay Yourself First budgeting, 20 percent of your take-home pay FIRST goes towards your savings.
The remaining 80 percent of your pay goes towards your wants and needs.
This is a very loose (and simple) budget to follow because there isn’t a lot to track…however, by not assigning your money a specific purpose, it can be easy to overspend and have “holes” in your budget.
You’ve considered all of the budgeting systems and decided a Budget by Paycheck is the right fit for you. Now what?
Nine Steps to create your new paycheck budget.
Choose the right tools for monitoring your budget
First, you need to consider the best way to organize and monitor your budget. Choose a medium that you like. Some options include paper, a digital spreadsheet, a budget planner, an app, or software.
Be sure to choose an option that you will actually use! If you love a more physical and visual budgeting tool, a classic notebook and pencil or a printable budget planner might be the best option.
If you are more tech-inclined, there are apps and software available that can sync with your accounts allowing you to know exactly where you are with your budget with a swipe of your finger.
Pull out all bank statements, receipts, etc
The next step in setting up your paycheck budget is to determine exactly what you are spending each paycheck period.
I recommend pulling out all of your bank and credit card statements, receipts, and bills so you can realistically set your budget amounts.
It is important to have this information so that you can find holes in your spending (unnecessary or extravagant expenses) and set better budget amounts for each category of spending.
Create categories for your spending and then look through all of your expenses and write down exactly how much you spend for each category over the past two pay periods.
Not how much you WANT to spend, but how much you ACTUALLY spent.
Some possible categories to consider using are House Payment (mortgage, rent, etc), Utilities, Groceries, Eating Out, Insurance, Student Loans, Internet, Phone, Car Payment, Gasoline, Clothing, Entertainment, Gifts, Retirement (401k), Kids’ Sports.
You can also check out this post I wrote with even MORE budget categories to consider. The more specific your line item, the more closely you will be able to monitor your spending.
Create a budget for your pay period
A Budget by Paycheck means that you are going to create a separate budget for each time you get paid. For example, if you are paid bi-weekly and your take-home pay is $3500, you will have TWO budgets each month with a starting amount of $3500.
To create this budget, you will first need to confirm your incoming financials. Add up all of the income from your job(s) as well as government benefits and child support. Don’t forget to include any regular bonuses or money that you earn from side hustles.
PRO-TIP: If any of your incoming financials vary from paycheck to paycheck, create a budget based on the LESSER amount of money you could possibly earn.
For example, if I have a side hustle that earns me between $50-100 each pay period, I will create my budget based on $50…then if I happen to get the higher amount I can apply the “extra” towards paying down debt or my other financial goals.
Write down outgoing expenses
The next part of creating your Budget by Paycheck is to write down your outgoing financials for this pay period. With this type of budget, it is very important to write these down according to due dates.
You may need to try and shift some of your bill due dates to spread out your re-occurring bills more equally between your two paycheck dates.
If your mortgage payment falls during your first paycheck time period, then you could try to shift your due dates for other big categories to fit in your second paycheck budget.
Most companies will allow you to move your due dates within 15 days of the original due date without charging a fee. Call the companies to find out their policy. This is also a great time to see about any possible savings options for services like cable or car insurance.
Give every penny a job
Since a Budget by Paycheck is a zero-based budget, you want to give every penny a job. If there is extra money after you have subtracted your outgoing financials you need to assign them a category that makes sense.
This could mean adding more money towards your debt than usually budgeted, increasing savings or even padding your gifts category for Christmas spending.
It’s also a great idea to create a small buffer for unexpected expenses. You can do this by creating a line item in your budget for emergencies or by padding categories that typically have those unexpected expenses (automobile repairs, clothing, groceries, etc).
Consider using cash envelopes and establishing sinking funds
Using cash envelopes with a Budget by Paycheck is a smart way to stay within your budgeted amounts. You can use cash envelopes with all of your budgeted items OR only for variable expenses or line items where you tend to overspend.
After you have created your Budget by Paycheck, decide on cash envelope amounts.
Sinking funds are another amazing option for your Budget by Paycheck. A sinking fund is putting money aside for an expense that you know is coming.
Sometimes we will know the amount we need to save, as is the case for a child’s school tuition or a house insurance payment. Other times, we need to anticipate the approximate amount of a cost like Christmas gifts or a vacation.
As you are crafting your Budget by Paycheck, think forward to possible future expenses. Divide the total expense (or an estimate) by the number of months until it is due. Use this amount as a line item within your budget.
Check out this post for more sinking fund ideas to consider.
Decide where to cut back or how to make more money to reach your financial goals
As you are creating your Budget by Paycheck, it is time to reflect on how you can reduce expenses and/or if you need to earn more money to reach your financial goals.
Consider making your non-essential expenses more bare bones. Or try looking for a side hustle that could give you more wiggle room in your budget.
Establish your bill payment schedule on a calendar
In Step 3 of creating your Budget by Paycheck, you looked at due dates and tried to spread out your bills so that the expenses were more equal between your two paycheck periods.
Now it is time to create a bill payment schedule using a calendar.
I love to do this using a large wall calendar and different colored pens according to which paycheck the money comes from. You can also create a bill pay schedule using a spreadsheet, a budgeting app, or even schedule alarms on your smartphone.
If you decide to set up automatic payments from your bank to pay bills I recommend recording those dates and amounts due in a budget planner or spreadsheet.
The important thing is that you are establishing a consistent bill pay schedule and have reminders of when you need to pay your bills.
Use any extra for debt repayment, retirement, or current financial goals
You’ve decided on a budget system, gathered your tools, tracked your outgoing expenses, created a budget according to each paycheck, given every penny in your budget a job and, amazingly, find yourself with a little bit of extra cash at the end of a pay period.
What do you do? I want to encourage you to give that extra money more power by putting it towards debt repayment, retirement, or any other current financial goal!
It is so exciting to watch your money work FOR you instead of being a stressor. You will feel powerful knowing that you made a plan and executed it so well that you find yourself with extra money.
Keep that momentum going by applying this money towards your financial goals.
Other Tips to Consider for Paycheck Management:
Another consideration when creating your Paycheck by Budget is an Emergency Fund. Emergency funds are important because they take the panic out of unexpected expenses. An unplanned expense can be devastating.
Adding an emergency fund line item to your budget will give you peace of mind now AND in the future. Although the expense might make your paycheck budget a little tighter, knowing that you have funds available in case of an emergency is worth it.
If you are working on getting out of debt, you should begin by trying to save $1,000 in your emergency fund. As your budget frees up, most experts advise an emergency fund of between 3-6 months of living expenses.
You can read more about how to build up an emergency fund here.
Understand WHY you need to get financially organized
If you are trying to create a budget without understanding why you need to get financially organized it will be much harder to stick with it.
The truth is, budgeting is often a very painful and vulnerable process. Facing debt, analyzing your spending habits, and limiting your lifestyle can be very difficult.
The WHY behind financial organization is that it brings you a much longer-lasting peace and joy than living beyond your means.
Organizing your finances, although painful in the beginning, gives you authority over your money and the self-confidence that comes from living responsibly and meeting your goals.
Creating a budget and becoming financially organized is a practice in self-discipline that will ALWAYS be worth the effort you put into it.
Keep practicing and playing with your budget
One of the best things you can do for yourself as you establish your budget is to recognize that it can and should be a learning experience. It is extremely rare that someone can go from no budget to a perfect budget without any hiccups.
Keep working on your budget and change things that need changing. Keep learning about finances and try strategies that seem appealing and helpful for your situation.
And don’t be afraid to ask for help! As a financial coach, I would love to chat with you about your particular situation and give you advice on budget tweaks or strategies.
Final thoughts on the budget by paycheck method:
The more you are on top of your budget, the better your odds with success can be. Creating a Budget by Paycheck can be very rewarding. As you closely monitor your income and expenses and adapt your budget to fit your paycheck amounts you will be able to reach your financial goals.