Adding income to your budget is easy for someone who gets paid once a month or on the first and the 15th of each month. But what if you get paid every two weeks and have those “magic months” twice a year that contain three paychecks? What if you have an irregular income? How about a household where you both are paid differently? We’ve got all that covered, read below for more information on how to handle your paycheck frequency:
This is the easiest one of all. One paycheck equals one month’s expenses. Whenever your check comes in, use it to budget for the next month. For example, if you get paid on the first of April, then your mortgage, food and all other expenses for that month are covered by that paycheck.
If you get paid on the 10th and your mortgage is taken out on the first, then work your budget until the next paycheck. For example, money received on April 10 will cover all expenses for the next 30 days (such as your May 1st mortgage payment, food and all other expenses) until May 10. At that point, your May paycheck will take care of everything until June 10, and so on.
Twice Per Month
This one is perhaps the most common pay schedule. You get paid on or around the same two days each month, such as the 15th and 30th. The best way to work this is to treat the paycheck on the 30th as the first paycheck for the following month. That’s because it can be confusing to make a budget at the first of the month when you don’t get paid until the 15th.
For example, if you receive paychecks on August 15 and 31, then the 31st paycheck counts as the first money for September. So to work your entire September budget, you’ll use the August 31 paycheck and the one from September 15. The paycheck on September 30 counts as the first money toward October, and the October 15th is the second paycheck for it.
By doing it this way, you already have a paycheck in place by the time you turn the calendar. You can attack the bills in the first half of the next month without wondering which paycheck is supposed to cover what.
This kind of paycheck is just what the name implies. You get paid once a week on the same day. Just like with the “biweekly” pay structure (next entry), there will be some months where you get an extra check. In this case, five paychecks instead of four.
Each paycheck you get, save a quarter of your house payment out of it. If your mortgage note is $1,000 a month, then save $250 from each check. For the months with five checks, put that extra $250 toward your current Baby Step. Then work your month’s budget with each subsequent paycheck.
This type of pay schedule can be especially frustrating because sometimes the checks will come on the 1st and 16th. Other times it will be the 10th and 24th, and you aren’t sure what money is supposed to cover what bills in what month. Still other times, it will give you three paychecks in a month. It’s more to work with, but finding what to do with all the cash can be a head-scratcher.
First off, remember that you’ll have at least two paychecks in any given month. If you are paid on the 9th and 23rd, don’t panic that the checks arrive too late for some bills and too early for others. There are at least two checks per month. That will keep you grounded.
The key to having enough money when the pay cycle is weird is to look at the two-week period in front of you. If March 25 is payday and your mortgage is due on April 1, then that March 25 paycheck covers your remaining expenses for March plus the April house payment and any expenses until your next check. Therefore, look at how much money you need for the next five or six days and subtract that from your paycheck amount. Whatever is left is money that you’ll use for the next month.
Here’s an example: You get paid on Friday, March 25, and the paycheck is $2,300. You estimate that it will take $400 to get you through the rest of March (covering food, gas, bills, etc.). You also have a house payment of $1,100 due at the beginning of April. That means you need $400 for March, so put that into March’s budget. Then take $1,100 to cover the April house payment, and the remaining $800 of the $2,300 paycheck covers your bills until the April 8 paycheck comes in.
If you get three paychecks, the formula is similar. Let’s say you get paid on Friday, September 2, as well as the 16th and 30th. By the time you get that last check, September’s budget is done and you are on to October.
When that happens, look at your budget for the first couple of weeks in October and determine what bills will be due, how much you’ll need for food, gas, etc. Once you have that number, subtract it from that third September paycheck, and whatever is left over is the extra money that you can put toward debt, savings or something else.
This type of paycheck usually applies to people who work on commission or are small-business owners. Some months may be outstanding and others are anything but. The strategy here works a little differently.
When you sit down to make your budget, you make what’s called a prioritized spending plan. You list expenses in order of priority. The cable bill is not as important as eating, for example, so it goes further down the list than food.
Setting Priorities With Irregular Income
When you have an irregular income budget, the first budget items you should cover are:
Shelter and Utilities (mortgage, electric bill, etc.)
Clothing (within reason)
Transportation (gas for the car)
Here’s how you make a prioritized spending plan. List all your budget items for the month, just like when you make a regular budget. When they are all listed, look them over and number them according to their importance. Following the Four Walls, you’d place a “1” beside “Food.” By doing this, you are saying that if you only have enough money to pay for one item on the list, it will be food. Keep moving down the list until everything is numbered. Then rewrite the list in order by number. Now you’ve got a prioritized spending plan.
Here’s the second step. Beside each line item, write the amount of money you realistically want to spend on that item. Spend down the list (on paper) until your money runs out for that month.
Now, step number three. When you get paid, start at the top of your list and work your way down.
Draw a Line
Once you have spent all your income for the month, draw a line at the place where the money ran out. Everything below the line doesn’t get paid because the money has run out. If you cover everything and have money left over, use that extra cash to walk yourself up the Baby Steps.
Over the Hill, Through the Valley
It is also a good idea during those good months to set up a hill-and-valley fund.
A hill-and-valley fund is a savings account where you put aside extra money to get you through the lean times. It’s one step down from an emergency fund. With an emergency fund, you only use it when the transmission goes out or a roof starts leaking. The hill-and-valley fund is there to help you meet monthly expenses when you run short.
If you are a straight-commission salesperson with a $5,000 household budget and you earn $7,500 one month, put that extra $2,500 into the bank. That way, when a month comes along where you only earn $3,000, you have reserve savings at hand to cover expenses.