In order to Take Financial Control you’ll first need to use a method, like this one, to create a budget. Once you’ve created a budget, it’s time to put it in to action. There are endless ways to follow a budget but I find this method to be the easiest and most responsible way to manage your cash flow. The foundation of this method is that you never spend money you don’t have, meaning you’ll be using your previous paycheck to pay for your upcoming expenses. For this example we will be budgeting for every pay period, however, this can be adapted to any time period.
Buffer
In order to use your budget effectively you will first have to prepare for it by setting up a buffer. This buffer will be equal to the amount of one paycheck and reside in your checking account. This first step towards using your budget will remove you from the stress of living paycheck to paycheck. If you’re not living paycheck to paycheck right now, you can create this buffer more easily. If you are depending on that next paycheck to pay your current bills, then you have some work to do. To achieve this buffer you’ll need to slowly put aside more than one paycheck worth of funds to create that buffer in your checking account. Once you have saved that extra cash, you’ll be able to continue along with the process.
The best part of this buffer system is that it will give you a pay periods worth of wiggle room, should you lose your job or encounter a financial emergency. It is also a much safer way to manage your finances and will help to eliminate the stress of waiting on that next check.
Procedure
Budgeting this way is very simple and requires just a small investment of time every few weeks. The day before you receive each paycheck is when you will reconcile all your spending over the previous pay period and pay your bills. The breakdown below exemplifies this process. It can can also be adapted to any paycheck cycle; weekly, bi-weekly, monthly, etc.
Routine
- Receive Paycheck #1 and begin Spending Period #1
- Spending Period #1: Days between Paycheck #1 and one day before Paycheck #2
- Day before Paycheck #2: Distribute Funds from Paycheck #1 to cover costs during Spending Period #1
- Repeat
With this method, you will always be spending money that is already in your bank and will never need to rely on your next paycheck to pay your bills.
Budget in Action
If you followed along with Creating a Budget, you’ll have ended up with a bunch of data that will help you use that budget; income (or average income), fixed costs (like bills) and your spending habits. Once you’ve applied the fixed costs to your income you’ll end up with your remaining free cash. The figure below combines all the information from our example budget in the previous post and applies the buffer and distribution procedure described above. We will be using three accounts in this example. The checking account will be where income is received and distributed from. The savings account will be treated as an emergency fund and the retirement account will be treated as an auxiliary savings account. In our example we’ll be assuming a monthly paycheck but this can be adapted to work with any paycheck style; just adjust how much your fixed costs need to be withheld from each paycheck. For example, if you get paid twice a month and your rent is $650 then $325 per check needs to be withheld to pay for rent.
Initial Checking Account Balance: $2500
this is the buffer equal to one paycheck
Distribution of Funds to Fixed Costs
-$650 to Rent
-$60 to Car Insurance
-$50 to Cellphone
-$15 to Spotify
-$50 to Internet
-$150 to Utilities
-$250 to Health Insurance
-$300 to Student Loans
Checking Account Balance: $2500
Fixed Costs: -$1,525
New Checking Account Balance: $975
Money Spent During Spending Period #1
- $500 (Cash & Credit Spending)
Checking Account Balance: $975
Spending Period #1: -$500
New Checking Account Balance: $475
Transfer to Savings: -$300
Transfer to Retirement: -$75
Final Checking Account Balance: $100
(to avoid overdrafts)
Distribution Complete, Payday is tomorrow
Payday: Paycheck #2 Received: +$2,500
Checking Account Balance: $2600
Repeat the process the day before the next payday
Budgeting this way will not only leave a little extra in your checking account to avoid overdrafts, it will also allow you to be flexible enough so that, should you go over budget, you’ll be able to deal with it easily.
Stick to It
Since this example can be modified easily to your situation, it should be easy enough to implement and after a few pay cycles, will become second nature. The most important part of this whole process, will be sticking to it. You can’t let it slide or give it up just because you went over budget. Each time you go through your distributions you can adjust your budget or behaviors accordingly to guide you toward more financial freedom.
86 COLD HANDS!
