The simple beauty of paycheck budgeting

We tend to treat money like a big picture problem that can be solved with big picture solutions. Ideally, with the right knowledge and a little effort, you can plan out your financial future months and even years at a time.

But for a lot of us, the big picture is a little too big right now. It’s hard to think about owning a home or planning for retirement when you keep coming up short on rent every month.

If the idea of an annual budget, or even a monthly budget, seems like a waste of time to you, try something else – try budgeting your paycheck.

You may already do this informally, but let’s make it official. Here’s one method for thoughtfully managing your money, paycheck by paycheck.

Step 1: List your bills

As a kid I remember seeing a little rectangular piece of paper tacked to the wall above the desk where my parents did paperwork. It had three columns and simply listed the name of their monthly bills, the minimum payments, and the due dates.

Make a list like this for yourself and place it somewhere visible. Include all of your regular monthly payments, like mortgage, car payments, cable, etc. If you’ve got variable monthly bills like your heat or electricity, list those as well (the payment amount can be blank, but be sure to include the due dates).

Do you pay any of these bills automatically with an electronic transfer? Leave the bill on the list, but put an asterisk next to it.

Step 2: Break down your 1st paycheck

When your first paycheck arrives, sit down with your list of bills and a piece of paper. Decide how to spend that paycheck and that paycheck only.

How should you spend that money? Some tips:

• Consider your due dates. What needs to be paid with this money? Any bills that are due before your next paycheck should be paid. Subtract that amount from your paycheck – that’s now been spent.
• Make partial payments on large bills. You may not be able to pay some of your larger bills in full with the funds from one paycheck, especially if you get paid weekly. If it isn’t due until later in the month, pay half the bill now, or whatever you can comfortably manage.
• Make educated guesses. You’ll probably need to buy some groceries with part of this paycheck. How many times are you likely to go food shopping before your next paycheck? How much do you usually spend per trip? Create an educated guess for regular expenses like food and gas and subtract that amount from your paycheck.
• Use every penny. Dedicate every bit of that paycheck to something. You don’t have to actually spend all of it right then – in fact I wouldn’t recommend that you do – but you do want every nickel and dime accounted for in some way.

Step 3: Spend your plan

Now that you’ve decided where that money will go, follow through. To the best of your ability, only spend what you’ve allotted yourself for food and leisure. Pay your bills on time. Set aside the money you’ve symbolically already spent on the bigger bills coming up down the line.

Step 4: Break down your 2nd paycheck

One or two weeks later, another paycheck arrives. Again, you sit down with the check, your list of bills, and a piece of paper and you pay what needs to be paid this time. Take care of the bills you didn’t pay with the last paycheck. Strategically plan out those variable expenses.

As you get later in the billing cycle, if you find that you’ve accounted for all of your monthly bills, and you’ve plotted out your various expenses to the best of your ability, but there’s still a little left over, spend it. And by that I mean put it in savings.

Don’t leave money hanging out there. It sounds nice in theory – you might consider it a little cushion – but money that’s up in the air has a tendency to float off into the ether, never to be heard from again. Tight budgets need to be strict budgets. So take any leftover money and stash it into a savings account. You’ll still have access to it if needed, but you’ll be much less likely to spend it on something you don’t need.

If big picture budgeting isn’t for you, that’s okay. But it doesn’t mean you should give up on budgeting altogether. Paycheck budgeting is all about creating a plan for that paycheck – the one in your hands right now. It may not be the best way to budget for the rest of your life, but if things are tight, it might be the best option for you right now.

Happy budgeting!