Budgeting for Your Pay Cycle

I was recently talking to a friend and casually mentioned the fact that I get paid once a month. Her eyes widened a bit and she said she’d never be able to get used to that. “I’d constantly be waiting for that next paycheck,” she said. I’ll admit that when I first started out and had no savings, getting paid only once a month was tricky. But with one very simple step, getting paid once a month was no longer an issue.

At the end of the day, whether you’re paid once a month, twice a month, or bi-weekly, you’re still earning the same amount of money. The only thing that will need to change is how you organize your bills. Once you have everything set up to correspond with your pay cycle, you’re good to go. After the jump, I’ll discuss how to budget based on various pay cycles.

Monthly Pay Cycle

My company seems to be a rare example of one that only pays its employees once a month. Like most of my coworkers, I would love to switch to twice monthly paychecks, but for me it is for no reason other than I like seeing money deposited into my bank account. On that one day each month when I get paid, I get very giddy to see my bank account shoot up. More money to invest!

However, when I first started working right out of college, I had one big problem: my credit card was due on the 6th of the month, but I didn’t get paid until the 15th. As a kid with no knowledge of personal finance or budgeting, I didn’t know how to deal with this. I got my paycheck on the 15th of each month and instinctively looked at my bills that were due by the end of the month. A bill that was three weeks away (and a week into the following month) easily slipped off my radar when I was tabulating where all my money would go. Then when the due date was looming, I would realize, “crap! I have a bill due that I completely forgot about!”

So I called up my credit card company and asked them to change my due date to be one week after payday. That made all my bills easy to manage. I got paid on the 15th, and all my bills were due by the end of the month. Easy!

Now if you’re less forgetful, a better planner, or just have a healthy emergency fund built up over time in case you forget to plan for a bill, it’s easier to manage bills that don’t neatly correspond with your simple payday service. But even 5 years into my career, I still like having my credit card bill due right after payday. When my company switched payday to the 26th of the month, I changed the due date on my credit cards. It’s just easier for me to keep track of that way.

If you don’t have any bills due the two weeks before your monthly paycheck, you should never feel the pain of waiting for payday.

Twice a Month Pay Cycle

From my conversations with friends and what I see on other blogs, this seems to be the most common pay structure. With the twice a month pay cycle, you get paid twice each month on set days, say the 1st and the 15th. This is probably the easiest pay structure to budget around, but there are still a few ways to do it.

You could use the same tricks mentioned above, and schedule your bills to correspond with one of your paychecks. Maybe you pay rent from the paycheck you receive on the 1st of the month and schedule your credit card bill to be due at the end of the month, using the paycheck you receive on the 15th of the month.

I’ve also heard of many people who strive to save 50% of their pay, so they designate one paycheck to cover all their bills and the other to go to savings. To manage this, you need to keep close track of your accounts. One paycheck needs to go into a checking account that is only used to pay bills, and the other needs to go into another account (emergency fund, investments, etc.) that is only touched if you end up spending over 50%. Since saving 50% of your paycheck isn’t easy, I would absolutely recommend having a very nice emergency fund that you can dip into on months where you don’t meet your goal.

Bi-Weekly Pay Cycle

The bi-weekly pay cycle is slightly different than the twice a month cycle. With this pay structure, you get paid every other week, which ends up being twice a month for 10 months out of the year, and three times a month for the other two months. There are some benefits  and some drawbacks to this type of pay structure.

The oft touted benefit is the two “bonus” paychecks each year. Since you budget for the typical month with two paychecks, the months when you receive an extra paycheck feel like you’re getting extra money. Some people will use this extra money to treat themselves to something nice, but of course I’m going to advocate boosting your savings with that money. Two paychecks you hadn’t factored into your budget = two paychecks you can easily live without. Throw those suckers into an index fund or use them to max out your IRA.

The drawback to the bi-weekly pay structure is that your bills are always due on the same day of each month, but your paychecks don’t come on the same day each month. They may be the 6th and 20th one month, and the 4th and 18th the next month. That makes scheduling your bills to correspond to your paychecks a lot harder. I have to admit that this pay structure would be challenging for me because I thrive on consistency and routine. Some months your credit card bill may be due a few days after one of your paychecks, but other months it may be due a few days before a paycheck, so you can’t always use the first paycheck or always use the second paycheck to pay your bill. You need to be flexible, you need to track your spending carefully, and you need a healthy emergency fund in case you find yourself with a bill due at an inopportune time in your pay cycle.

Other Types of Pay Cycles

The above are some of the more common pay cycles, but they are by no means the only ones. Some people get paid every single week, which I have to imagine makes budgeting mighty simple. Teachers often get paid during the school year, but their paychecks stop when school is out for summer, so they need to budget for the summer dry spell with each paycheck they receive. Consultants and contractors get paid per job, so they need to budget carefully, especially if they don’t have their next job lined up.

For workers with irregular pay structures, budgeting isn’t easy. Forecasting your income, tracking your monthly expenses closely, and maintaining a sizable emergency fund are necessary. You never want to be caught off guard with a bill to pay and no money with which to pay it.