Item: Biweekly pay does not correspond to the world we live in, where bills are due monthly.
Item: Because we pay our recurring bills monthly, we naturally calculate all the rest of our budget items-such as groceries and home maintenance costs-on the same monthly basis.
Item: Biweekly paychecks move around. They precess in such a way that eventually one of them will miss coming in at a time when we need the money to cover monthly bills. This precession is the reason we end up with the two so-called “extra” checks a year, which are not extra at all but simply cover two weeks during which we otherwise would starve.
Item: This disconnect between biweekly pay and financial reality adds up to one huge budgeting headache.
After much gnashing of teeth, I finally figured out how to deal with this, based on one startling Insight: a monthly grocery and incidentals budget does not have to run from the 1st to the 31st. It can run over any 31-day cycle . . . say, over the period of a credit card cycle. A credit card represents a tool that gives you the versatility to stay on budget in the biweekly environment, and automatic bill pay lets you schedule most recurring payments so they will be covered by your salary. Here’s how:
You need the following items:
- A paid-off credit card with a billing cycle that closes late in the month
- Three bank or credit union accounts: two accounts you can write checks on and one a savings or money market account with the best interest rate you can wangle
- Online access to the same
- Automatic paycheck deposit into the checking account
- Automatic bill paying from that same account
Your checking and savings accounts should be in a credit union or other institution that does not dream up ways to gouge you for making transfers, writing checks, or in other ways using your own money to suit yourself.
Start this process with a pay period that occurs near the beginning of a month.
Step 1. Calculate the total of your monthly recurring bills. If some, such as utility bills, change from month to month, base this calculation on the highest amount likely to occur. For example, I do not have my electric bills prorated over the year, because while the summer bills are just barely affordable, the spring, fall, and winter bills are so much lower they leave me with significantly more spending money during those seasons than I would have on the prorated plan. So, my figure for total recurring bills includes the highest probable summertime power and water bills, plus loan payments, telephone bills, etc. The total comes to about $880. In the wintertime, the difference is available for Christmas presents, purchases in holiday sales, paying down debt principal, and savings.
Step 2. Figure the amount you need to put in savings for bills such as insurance that occur annually or biannually. Because my house is paid off, I have to set aside $300 a month to cover property tax, homeowner’s insurance, and car insurance.
Step 3. Figure any amount you wish to pay toward loan principal. I try to pay $250 a month extra.
Step 4. Figure the amount to go into monthly savings toward an emergency fund to cover extraordinary expenses. In the biweekly regime, that amount has dropped from $200 to $170 a month for me.
Step 5. Calculate the amount you can afford for food, household expenses, gasoline, the dog, the cat, the kids, weekend do-it-yourself projects, repairmen, eating out, and all other ordinary daily living expenses. In other words, this category includes everything other than savings and recurring bills, and it all will be racked up on a credit card that must be paid off each month. In my case, this amount comes to $1,500 a month, or about $375 a week.
Step 6. Arrange to have your paycheck automatically deposited to your checking account.
Step 7. Arrange to have all your recurring bills automatically deducted from your checking account as late in the month as you can manage: preferably around or after the 20th.
Step 8. Each time a paycheck is deposited, immediately go online and transfer 1/2 of the month’s amount needed for savings into your savings or regular money market account; transfer 1/2 of the amount needed for daily expenses into the second account on which you can write checks (I use a money market checking account); and leave 1/2 of the amount needed to cover one month’s recurring expenses in the first checking account. You must do this promptly after your paycheck is deposited.
In most or all months, your recurring monthly bills are now covered, because they will not come due until after two paychecks have been deposited. You also know exactly how much you can spend for daily expenses, and you have safely stashed away your regular savings.
Step 9. Charge all daily expenses on one credit card whose billing cycle ends late in the month. Because your credit card bill is not due for a week or so after the closing date, you get a float that insures two paychecks will cover your budgeted routine spending.
Step 10. Divide your routine daily living expense budget into four periods, spanning the billing cycle (in my case, this runs from the 21st to the 20th, since the cycle closes on the 20th). Each of these mini-periods is about a week long; in my case, this gives about $375 to spend each week. Set up a spreadsheet with four columns, each representing seven or eight days of the billing cycle. Place the budgeted weekly amount at the top. As you make charges, subtract each charge from the weekly budget, so you will know how much you have left to spend at any given time.
If you overcharge in one week, you will need to cut the amount available in the following week by that amount. In other words, if I spend $400 in the first week, the amount I have to spend in the second week will be $25 less than the $375 budget, or $350. To make this work, you must enter your charges at least once a week.
If you make the final day of the billing cycle a no-spend day, everything you have charged will likely clear on the coming statement. So, when you pay your bill, you’ll cover all of one month’s living expenses.
Use the amount you set aside for daily living expenses to pay off your charge card in full at the end of the month. Any amount you have left over in the “daily living expenses” account can go toward paying off debt or directly into savings.
Here’s what timing your daily living expenses to your credit card cycle does for you: Even though you may not have a paycheck to cover groceries needed three days after the cycle closes, on that day you are not drawing from the paychecks already in your account. The amount in your account will cover the statement winging its way toward you, so the charges you make after the close of the cycle will not overdraw your checking account. The money to cover the next billing cycle will arrive before the end of that cycle, and so you’re still using your salary to cover your expenses. It means that, as long as you stay within each billing cycle’s budget, you do not have to go hungry or run up finance charges in months when biweekly pay does not cover monthly expenses.
Are you paid biweekly? If you are, how do you go about making biweekly paychecks cover a monthly budget?