Payday. Your checking account is full. You finally have money to restock your fridge, buy the shoes you’ve been eyeing, or treat yourself to dinner at the new restaurant in town. But if you find yourself running out of money, spending a bit too much on payday, then worrying later in the month how you're going to pay your bills, you have a budgeting and cash flow issue. You might have to readjust your spending strategy.
Dealing With a Monthly Paycheck
A monthly paycheck can be the mother of all challenges. One way to deal with it is to divide your monthly budget into weekly amounts.
Check the due dates on all your must-pay monthly bills. You'll almost certainly find that they're not all payable on the first of the month. Some might be due on the 15th or the 21st.
Divide them all up on an appropriate weekly schedule: week one, week two, week three, and week four. Ideally, your monthly paycheck will be enough to cover each segment when you divide your income into quarters as well. If week three is bulging with bills—but week two is relatively light—pull one of the bills due during the third week into the second week.
What's left after covering these must-pay regular bills is what you can spend that week on groceries or other things. It's "discretionary." In other words, it's more or less up to you. You might find that you have to tighten your belt occasionally each month, but it hopefully won't happen week in and week out.
Another option is to set things up, so you pay all your regular bills on or near the first of the month, even if one of them isn't due until the 18th. Then divide what's left into weekly amounts to cover discretionary spending throughout the month.
Of course, this only works if you get paid on the first of the month, and all your bills from last month are resolved, or if you have a month's worth of savings set aside to get you started. You might want to take on a temporary second job to get ahead by an entire month, or you can use your tax refund or a bonus to save up the money quickly.
Dealing With a Semi-Monthly Paycheck
If you're paid twice a month or every other week, you probably have times when you're barely making it paycheck to paycheck, and times when you have a lot of extra money. The solution is to set aside money from your paychecks when your bills aren't due to cover them during the paycheck when money is tight.
For example, you would set aside half your rent or mortgage payment and half your utility costs with every paycheck. You can have the money automatically transferred to a savings account, so you don't see it if you know you'll be tempted to spend it.
A Basic Budget Example
Having a solid budget in place should prevent you from spending too much on shoes, so you don't have to eat Ramen noodles the last week of every month, regardless of how often you're paid.
Add up your monthly take-home pay regardless of how many times your employer hands over a paycheck, and include any additional sources of income you might have. Maybe you have a side gig going on.
Now tally up your must-pay bills. These would typically include your rent or mortgage, utilities, estimated tax payments that aren't withheld from your pay—if any—and things like your cellphone plan. They're necessities, things that would be difficult if not impossible to live without and commitments you can't easily get out of without paying a penalty. Think insurance premiums, minimum credit card payments, and your car payment—you want to keep your credit score healthy. If some of these bills are due quarterly or semi-annually, divide them into monthly amounts.
Ideally, your take-home pay exceeds your must-pay bills. If not, or if it's an uncomfortably tight squeeze, look back at your must-pay bills to see where you can trim down. Maybe you can get by without that amazing cellphone plan and pay for more basic service. And do you need all of that insurance coverage?
The idea is to create a somewhat sizable gap between the money that's available to you and what you must do with it. Anything you want to spend money on has to come out of that difference. And don't forget your savings. The difference should be significant enough to let you stash some money away each month as well. Cut back on your fun spending if it's not.
You'll also have to cut back on the fun if any of your regular bills increase out of the blue due to a rate hike or other unforeseen events. That extra money has to come from somewhere.
Other Budgeting Ideas: The Envelope Method
Another option is to use the envelope method, particularly if you do have some cash in advance.
Separate the expenses that you can pay for in cash. These will typically be discretionary items, like buying lunch rather than brown-bagging it, but groceries fall into this category, too. Determine how much you'll realistically need for each, then assign each its envelope containing enough cash to cover these expenditures. When the money in the envelope is gone, it's gone. You might have to brown-bag it occasionally.
The 60% Approach
This option takes some discipline, and it might require some downsizing or other adjustments. Richard Jenkins, a former writer for MSN Money, suggests confining your must-pay expenses like rent or mortgage, utilities, car payment, insurance, and minimum loan payments to 60% of your pay. Gulp. That might feel tight enough, but Jenkins also proposes this solution based on your gross, not net, pay. Your gross pay is what you earn before taxes, and other mandatory deductions are made.
Now divide the remaining 40% into quarters, 10% each for "fun" money, retirement savings, emergency savings, and long-term savings. Of course, at least one of these categories is probably going to fall short if it's based on $1,000 a week in gross pay, but you're only taking home $750 a week, at least if you're not including taxes in that first 60%. This circumstance is where downsizing might have to come in—maybe trade your car in for cheaper wheels.
The 50/30/20 Budget
Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, came up with this method. It's similar to the 60% approach but with slightly different percentages. This process begins with your take-home pay, which may be all you have to work with unless you have other income sources. The first 50% goes to those necessities, but the Warren plan lets you assign 30% to discretionary spending. The remaining 20% is earmarked for savings and paying down your debt.
Don’t Forget Your Emergency Fund
Having an emergency fund is one of the best ways to eliminate financial stress and ensure that you have enough money to pay your bills even if an emergency comes up. But be careful that you're not continuously dipping into this money because you overspent on those shoes or groceries.
Your emergency fund is meant to pay for real emergencies, like job loss, a car repair, or an unexpected trip to the hospital. It allows you to absorb these costs without adversely affecting every other part of your budget.
It's important to replenish your emergency fund as quickly as possible if you have to use it so you'll always be ready to handle any disaster life throws at you.
Make Sure It's Not an Income Issue
You'll always be living from paycheck to paycheck if you're not making enough money. Address any income shortfallings first before you figure out how to budget to cover all your bills and expenses. This income review might mean changing jobs, taking on a second job or income-producing side gig, or going back to school so you can get a higher-paying job in the future.
And cutting back—at least temporarily—can be as beneficial as earning more. Do you have an extra bedroom? Maybe take in a roommate.
When you're feeling the end-of-month squeeze, of course, you want financial relief immediately. Still, if you begin to implement these strategies today, you'll see positive change and greater financial ease with each paycheck you receive.