Wednesday, July 30, 2008

Dealing with a monthly paycheck

When I first started working for the company with which I am still employed, I was completely thrown by how often my paycheck was deposited into my checking account: biweekly. For many people, this is commonplace. However, for the six years prior, I had received a monthly paycheck. I liked this because I knew what my income was for the entire month and that it had to cover all my expenses (hopefully with a bit added to savings). One paycheck gave me a total I needed to keep under when planning for the month, and I created a budget that accounted for all the money I was given on the first of the month.

Now, I have embraced the biweekly paycheck because I save two and live on the money from 24. I like the extra boost to my savings without much pain and have adapted to having at least two influxes of money in my account each month. However, my spending plan is still created monthly and I tally up savings in a month-to-month basis. Here are a few tips to keep within a monthly paycheck plan that have served me well:

Ignore the last three digits on the paycheck.
If I was paid $803.47, I created a $800 budget. The extra money could be directly saved in a separate savings account or left in the checking account as a cushion. While amounts under $10 do not seem like much, it is a start to creating some extra money for emergencies.

Account for regular and irregular expenses.
It took me some time to learn this lesson, but it is important. If a spending plan has categories like rent, utilities, food and gasoline, do not forget to add categories like gifts, car repair, car insurance, pet care, clothing and others that crop up in a predictable fashion (e.g., car insurance) or go in streaks (e.g., birthday gifts or school clothes shopping). Be realistic about these category amounts as well. Do you spend $20 or $100 on each person? In the case of gifts, multiply the amount per person by the number of people you buy gifts for and divide by 12. Round up if it is not a whole number (e.g., total is $11.53 so designate $12). Look at past vet bills or credit card statements to get a handle on the amount of money spent on a category and figure out an appropriate monthly amount for the spending plan. As always, round up to to give a bigger cushion. No numbers are fixed, even car insurance, but by giving these fluctuating expenses room in your budget, you are less likely to abuse savings accounts or credit cards.

Automate deposits and transfers.
In the beginning, I had my paycheck automatically deposited into my checking account and then manually transferred money to my savings account later. Strangely, I did not save as much as I had planned. I am comfortable using the web-based interface at my credit union so I quickly setup an automatic transfer to my savings account each time I received a paycheck. I was stunned how much money I saved using this automatic method. Out of sight, out of mind. However, be sure to record the transfer if deposited to your checking account so as to not spend the money. Other people have had great success by having their paycheck deposited to their savings account and transferring a set amount to their checking. Use whatever method works better for you.

If you are still receiving a paper check, ask the teller (or ATM) to divide the money between checking and savings accounts when you deposit the check. I highly recommend electronic deposit. It saves you time and gasoline since you do not have to go to the bank and in my case, the money is immediately available on pay day.

Refine the budget.
No budget or spending plan is set in stone. Adding up all the money spent on a monthly basis may be an eye-opening experience, helping to reinforce how well or poorly money is being managed. If overspending is an issue (with possible credit card debt), figure out which categories to reduce spending and plan to start paying off the credit card. If you are spending less than you earn, see if you can add a bit more money to the savings account. Do you want a house? Remodel or update a room in your home? Have you started saving for retirement? Do you want to travel the world? After saving for emergencies, define a savings goal you would like to work toward. Even moving a few dollars among the categories because the Netflix subscription was ended in favor of prioritizing grocery spending to buy more local and organic foods.

Figuring out where your money is going is the first step toward taking control of it. With a monthly paycheck, the limit to your spending is listed in black ink. It would be even better if spending was below that number. Use the number wisely, keep a cushion for the future and plan for expenses as well as you can. Unexpected emergencies will happen and the less money you spend of your income, the greater your ability to deal with financial pressures. In addition, a spending plan will help smooth out monthly finances so it is not feast at the beginning of the month when the paycheck is received, and famine at the end when waiting for the next paycheck.

Update: Welcome to those readers from the Carnival of Money Stories #71-Wander Around the World with Me! If you liked my post, please explore my blog or subscribe to my RSS feed.

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