Are you having a hard time budgeting because you live paycheck to paycheck? While you would like to budget, does it feel like you can barely hold your head above water? Does the thought of carefully planning out your spending and getting ahead seem like a pipe dream? If you feel this way, you are not alone.
Many people, when asked if they budget, respond with something along the lines of, “I don’t make enough money to budget,” indicating that they believe they can only budget when money is flowing freely. Well, the irony of that thinking is the money will never flow freely unless you (you guessed it…) budget.
To break the paycheck to paycheck cycle, your spending needs to be prioritized and managed in a way that there is room to save some of your income, whether it’s for an emergency fund, retirement savings, or for a future vacation or large purchase. You will not wake up one day suddenly having enough money to cover your monthly expenses as well as having some money left over. The only way to get to that point is to budget.
If you have income at all and you have any expenses at all, then you can budget — regardless of how close those numbers might be. You do not need a surplus of money to budget. Everyone — even those living paycheck to paycheck —can budget.
Before we get into the how-to of budgeting, let’s explore what a budget is not. Having misconceptions about budgeting is a common reason why people continue to live paycheck to paycheck.
A Budget is NOT a Prison For your Money
Do you want to run the other way when you hear the word, “budget”? This may be due to the popular perception that a budget is all about restriction; it’s all about what you can’t do. No eating out, no shopping, no fun. A budget is a giant reminder of what you’re missing out on.
The opposite is true…
A Budget is a Plan for Your Money
A budget is a map, guide, or plan for how you are going to spend the money you have coming in each month. It is simply an intentional plan for your money.
Will there be things you can’t do sometimes? If there is no money to do them, then yes. But you are in control of your budget. You get to decide and prioritize where your money is going. If you want to eat out and shop and there is money for those things, then put them in the budget.
Your budget will evolve and look different as you progress through your financial journey. While there will be times that everything you want to do with your money can’t be fit into your budget, consistently budgeting will eventually bring you the freedom to do more of the things you want to do.
A Budget is NOT a Perfect Picture of How Your Money Should Be Spent
Don’t get caught up in thinking your budget needs to be an ideal representation of how youshouldspend your money. If you’re waiting for your financial situation to feel perfect before you budget, then you will always live paycheck to paycheck.
A budget is not intended to represent an ideal.
A Budget is a Reflection of Your Current Reality
Again, a budget is simply a plan for your money, and sometimes that plan is not pretty. If you have more expenses going out than you have income coming in, then your budget will reveal that.
When you don’t budget, it’s easy to have a distorted or unclear view of how you are managing your money. As long as that’s the case, the paycheck to paycheck cycle will never end. Your budget will shed light on the fact that maybe some of your “needs” are wants, and it will force you to prioritize the expenses that must be prioritized.
Okay, so how do you start budgeting? How do you go from living paycheck to paycheck to budgeting? Well, without sounding patronizing, you just need to start. There is no need to wait for the stars to align. You can start today.
Ideally, you would create your first budget just before the next full month begins, but even that is not necessary. If there are two weeks left in the current month, then create a budget for the next two weeks.
Let’s walk through the basic steps of budgeting.
1. Write it Down
For a budget to be effective, it must be written down. You can also use budgeting tools or software, which we’ll highlight later, but the point is your budget must be documented. A budget cannot be floating in your head. At the simplest form, all you need is paper and a pencil to budget.
2. Start With Your Income
Add up all sources of income for the coming month (or the few weeks you may be budgeting for). If you work, your spouse works, and you drive for Uber, add up everything you expect to receive. Having this total is crucial to the process of budgeting. If your income fluctuates, do your best to estimate what you expect to earn.
3. Gather your Expenses
Now that you know what’s coming in, you need to look at what’s going out. Gather your current statements for all your bills and monthly obligations.
You will also need to know what you spend on non-fixed categories like groceries, spending money, etc. If you have no idea what you typically spend in those categories, a good place to start is to take a look at your bank statements or credit card statements for the last three months and find the average of what you spend monthly.
Next, think about any additional expenses you will need to cover during the month (or again, the partial month, if you are starting mid-month). These are occasional, non-recurring expenses like a doctor’s visit, an oil change, school pictures, etc. Try to think of everything you will have on your plate for the coming month.
4. Spend Your Money on Paper
Going back to your total income that you’re expecting for the month, start “spending” your money on paper. Identify the very first thing you will need to spend your money on, write it down, and subtract its cost from your income. The difference between the two numbers is what you have left to spend.
Then move to the next expense and do the same. Continue going through your expenses, prioritizing what must be taken care of. Do this until you have “spent” all your income. When the income is depleted, you stop spending.
This method is called a Zero-Based Budget: Your Income – Your Expenses = Zero
Here is an example of what a Zero-Based Budget looks like.
Ideally, one of your expenses should be saving, however, if you are living paycheck to paycheck and this is your first attempt at budgeting, then your first pass at it may or may not show room for saving. Keep budgeting, though, and you will get there. You will be surprised to learn that prioritizing your expenses results in having more money to do the things you need to do.
5. Plan How You Will Spend Each Paycheck
Once you’ve gotten your budget to “zero,” go back and plan when you will cover all the expenses. List the dates of your paycheck, and the amount you will receive for each check.
Keeping in mind the due dates of your bills, and the fact that you need to eat and put gas in your car each week, repeat the same process of “spending” your income on paper, but this time, you’re doing it for each paycheck. Spend each check down to “zero.”
Based on the example above, this is how those amounts are spread across four paychecks.
This process puts your plan of how who want to spend your money into action. This step of breaking down our expenses by pay period is essential to budgeting successfully.
Related Reading:
•How to Do a Zero-Based Budget
• 5 Common Budgeting Myths
• 8 Reasons Why Your Budget Doesn’t Work
