Living paycheck to paycheck can be overwhelming at times. However, there are things you can do to make this more manageable while you improve your financial situation. A financial plan based on each pay period will consider variable expenses, monthly bills, and quarterly expenses. Once you plan for your expenses, you can concentrate on building an emergency fund in a high-yield savings account. Afterward, you can set financial goals to pay down debt, save for long-term financial goals, and invest.
The main goal should be to have a zero-sum budget at the end of the month. All your monthly expenses and savings goals should leave every penny of your paychecks accounted for. It starts with knowing your next paycheck date, the due dates of all your bills, and setting up a bank account to execute your plans. There should be no extra money that has not been accounted for. Let’s jump in and learn how to budget when living paycheck to paycheck.
Paycheck Method of budgeting
The paycheck method requires you to match the due dates of your bills with your current paycheck date. It does not matter if you are paid weekly, bi-weekly, or on the 1st and the 15th of the month. The paycheck method works with any pay period. The best way to start is to grab a monthly calendar and begin marking it with your paydays and billing dates. You may also want to have your bank statements on hand for reference. This will ensure that you do not miss any quarterly or bi-yearly bills.
The next step is to determine cutoff dates for each bill. For a biweekly budget, it will be every two weeks. You can pay off any bills within the first two weeks. It can be used to pay off the rent, biweekly groceries, etc. It does not matter as long as you have the funds available to cover them.
Finally, determine how you will pay each of your bills, whether by debit card, checking account, or electronic funds transfer. Electronic Funds transfers are the safest and fastest and will prevent late payments. They are an easy way to make a car payment, credit card payment, etc. They can be set up using your bank, service provider, or merchant. More about this below.
Once you have exhausted the available income for this pay period, you hold the balance of your expenses until your next pay day. Let’s review an example of how this could work with a Biweekly pay cycle.
Biweekly Budget
Below is a simplistic example of a biweekly paycheck-to-paycheck budget. You spend a set amount on each bill until you have exhausted your funds. Every bill is accounted for, and funds are earmarked for savings. However, when you combine the two biweekly budgets, you have created a monthly budget that includes emergency savings.
Paycheck #1
After-tax Income $2,000
Rent $1,200
Groceries $150
Electric $50
Car Note $300
Savings $100
Fuel $50
Entertainment $100
Cash On Hand $50
Balance $0
Paycheck #2
Net Income $2,000
Credit Cards $500
Student Loans $360
Groceries $150
Car Insurance $110
Entertainment $100
Clothing $200
Gas $50
Fuel $50
Internet $80
Cable/Subs/Cell phone Bill $250
Cash On Hand $50
Savings $100
Balance $0
This is also considered zero-based budgeting because every cent of your paycheck is accounted for. You can use this same example if you are paid weekly or on the 1st and 15th payroll cycle.
Executing Your Budget
The first step in executing your budget is to plan how to pay each bill. You can pay your bills via online banking, snail mail, or by visiting the biller’s website or App. You will need the bill amount, payee information, and an accepted payment method. Whenever possible, consider setting up recurring payments for on-time and consistent payment.
Setting up auto payments works best for paying most bills. Therefore, you must ensure enough money is in your checking account to cover each expense. Some people like to use cash envelopes to pay their bills. The cash envelope method isn’t practical for me as I never carry a lot of cash. The cash method is popular with most people because it helps them control their spending habits. When all the funds are gone, all the bills should be too.
Learn about the pros and cons of the Cash Envelope System from nerdwallet. I have been budgeting for many years, so I tend not to spend more than I budget each month. However, there is some wiggle room in my monthly budgeting for irregular expenses should I exceed my budget.
Irregularities In Budgeting
Setting up a budget can be difficult if you experience irregular income. I suggest you work with the lowest possible income when you set up a budget. You can also add up your income for the year and divide it by twelve to achieve a workable number. Whichever number you are most comfortable with is the number you should use as your monthly income.
However, you can also experience variable expenses that can change each month, such as utility bills. You can take an average of the yearly total. Add up your utility bills for the year and divide by the number of times you receive a bill. Or you can budget for the highest amount to be safe. However, once you have established a pattern for your variable bills, you can use the actuals from the year prior. Hence, I have learned that based on seasonality, they are typically about the same from year to year.
Unexpected Expenses
Finally, for unexpected expenses that are beyond your budget, you will have to use your emergency fund. Your money goals should include an emergency fund that covers at least six months to a year of living expenses.
If your emergency fund is not fully funded, you may have to look into some side gigs or overtime to cover these expenses. However, I caution you not to borrow because that will only put you further behind. If you find yourself in a bind, I would pay rent, food, utilities, and transportation first. Cut any unnecessary expenses and contact your creditors to negotiate new repayment terms. Make every effort to stick to these new terms. In most cases, they will extend some grace to you to get back on track. They are in the business of receiving payment for the credit they have extended.
Planned Budgeting
When creating your personal finance goals, you should also consider long-term goals. One day, you may want to purchase a new car, take a lavish vacation, plan a wedding, have a baby, or buy a house. These are large expenses that will require long-term planning. To own a home, you will need a significant amount of money for the down payment.
In addition, depending on the type of vacation or wedding, it could take up to a year to save for these events to be debt-free and stress-free. Purchasing a new car could require a small down payment, but you must also plan for increased insurance and maintenance. Finally, having a baby will take a lot of money for their care and college education.
These types of long-term expenses could take years to save for. Hence, a dedicated savings account will be required for each goal. You will have to deposit the same amount regularly. Again, I encourage you to set up automatic drafts from checking to savings each pay period to facilitate these budgeting plans. This is when you set up sinking funds, which are savings accounts earmarked for a specific financial goal. Based on the amount of money you need and your timeframe, these accounts can take up to five to ten years to reach your goal. You will need to be consistent and dedicated.
Bi-weekly Budgeting And Extra Paydays
For those of you who are paid bi-weekly, there are two months out of the year when there are three paydays in the month. You have a few options to deal with this wonderful event. You can save it by boosting your emergency fund or sinking funds. On the other hand, you can get ahead of your bills by having the extra money to cover the next month’s expenses. This will help you move away from living paycheck to paycheck. Coupled with a fully funded emergency fund, you are on the road to financial freedom. Finally, you can put money towards any debt you have. This will help facilitate the goal of being debt-free.
Types Of Budgeting Tools
There are various budgeting methods and tools. Each budgeting tool will meet your needs, whether you prefer paper and pen, spreadsheets, or using an App. Pick one and get started towards financial independence. These tools can help you get out of debt, build your credit, and save for your future. Here are a few for you to explore for free. You can determine which particular budgeting method will work for you.
You can mix and match them depending on the purpose. Therefore, you can use a pen and paper to create your overall monthly budget. You can use the spreadsheets to help you forecast when and how you can pay down your credit card debt. Spreadsheets can help you with what-if scenarios for getting out of debt faster. Apps are good tools that can be linked to your financial institutions. They can set up budget categories to help you organize your spending, and they are always a tap away on your mobile devices. This is a good way to stay up close and personal with your finances.
PDFs for Paper and Pen
Make a Budget Worksheet from the FTC / Consumer.gov. It is a downloadable PDF file.
BF Budgeting Spreadsheet. Another PDF format.
Spreadsheet Format
BF Budgeting Spreadsheet from BudgetingFaithfully.com. It is a Google Sheet. You will need to download Google Sheets to use this Spreadsheet.
Free Budgeting App
Recap of How To Budget When Living Paycheck To Paycheck
Budgeting will not be easy all the time. There are going to be months where you exceed your budget, are below your budget, or right on point. However, you should never let a single month of overspending get you down. The good news is that there is always next month to catch up. The trick is to be consistent on a monthly basis.
Stick with it even though it may seem impossible at times. Utilize a budget calendar to get you started at the beginning of the month. Don’t be discouraged by variable expenses such as the food budget, utilities, etc. Remember, you have two three-week paydays to help you catch up. Make sure you have a budgeting plan to reduce your credit card debt on a regular basis.
Money management is something that can be learned, practiced, and achieved. You just have to persevere. The paycheck budgeting method is an effective way to learn how to budget. Paycheck Budgeting is the baby steps of budgeting because you work with your regular paycheck cycle for bill payments, spending limits, paying down debt, and savings.
Here are the Easy Steps To Budgeting
- Get a Calendar
- Mark it up with your bi-weekly paychecks and extra paychecks (months with a 3rd pay period)
- Add any extra income sources
- Record your take-home pay after deductions for Taxes, Social Security, healthcare, and retirement plan
- Add all your regular bills by their due dates on the calendar
- Set the cutoff date for bills when you have exhausted your available funds
- Start again using the next bi-weekly paycheck
- Once all your bills are accounted for, begin setting up a payment method for each bill.
- Congratulations! You did it!
This content is for educational purposes only. It does not constitute financial advice. If you need personal advice, please consult a financial advisor. I do not endorse any of the companies mentioned. Please research and do your due diligence. I do not get paid if you click any of the links.
Additional Resources:
Budgeting For Dummies: How To Budget Your Money
How To Build Wealth From Nothing By Investing?