Category Archives: Budgeting

Budgeting for Your Pay Cycle

pay cycleI 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.

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A Parking Lot Case Study

MP900385984Let me tell you a story about a parking lot. My fiancé and I went away for the holiday weekend with three other couples. On the afternoon of the 4th, one of the other couples went into town to pick up some supplies, and learned from a local that there was going to be a big fireworks show that night. The local told them that most people here for the weekend would gather in the park, but they’d charge you $8 to park there, so the locals usually park for free at the golf course across the street and watch the fireworks from there.

“What great inside information!” I thought. “We can watch the fireworks for free!” I was apparently alone in my thinking. “The people here are really cheap, they’re not willing to pay for parking, but we can afford to pay for parking, so we should just go park in the lot” said one of my friends.

I wanted to give him the benefit of the doubt. After all, the locals are indeed a bit seedy (we were in marijuana country) and we had children in our group, so perhaps my friend just wanted a more wholesome environment for the kids. However, something about the way he said “cheap” made me think that wasn’t the whole reason. There was the implication that the locals had to be cheap because they don’t have a lot of money, but because we are all gainfully employed, there was no reason we shouldn’t pay for the convenience of parking in the lot.

My suspicions were confirmed when, as we were approaching the gate to the parking lot, we spotted a parking space just outside of the lot where we could park for free and walk the extra 50 feet or so to the park – we’d get free parking, and we would be in the park with the tourists rather than the golf course with the locals. “Let’s just park there and walk into the park” I said, which thankfully at least got the agreement of one other person in the car. But despite that person being the one driving the car, she instead listened to her husband, who chimed in with “nah, let’s just go into the lot, it’s fine.”

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Weddings Kill Your Budget (But Not the Way You Expect)

weddingWeddings are expensive, elaborate, complicated occasions that require a lot of planning. You need to find a venue and then coordinate all your vendors, including a caterer, florist, baker, DJ, photographer, officiant, etc. There are a lot of details that require quite a bit of advanced planning. And most of those details are very expensive. That means you spend months and months immersed in things you would never pay so much for on a regular basis. It starts to warp your sense of perspective.

After you’ve spent weeks getting price quotes from caterers who want to charge you $100pp, suddenly going out for a $15 lunch doesn’t seem like such a big deal. Once you’ve tried on $1000 dresses, that cute $150 sun dress you saw at the store seems downright cheap. If you’re not careful, you could blow your entire budget.

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Budget Killer – Beauty Services

Woman Getting Facial TreatmentI used to go to a high end salon where I paid $60 per haircut. But after a few mediocre haircuts and an awful first experience getting my hair colored, I switched to a higher end salon near my office where I paid $90 per haircut (but stuck to coloring my hair at home from a box). It wasn’t until I pulled out my wallet to pay for my latest haircut at the overpriced salon that they informed me my stylist’s prices had gone up – to $120! I was flabbergasted. I asked why they didn’t tell me about the enormous price increase when I scheduled the appointment, and the woman said “well we increased our prices a month ago, I would have thought you’d already known about it.” I call bullshit. It was just terrible service. But terrible service aside, the place doesn’t take credit cards, and I didn’t bring enough cash to pay the bill and leave my stylist a decent tip, so I ended up having to stiff my stylist and leave him a crappy tip.

That experience was about 2 1/2 years ago now, and I’ve only had one $12 haircut since (more on that tomorrow). My fiancé will say it was at his request that I grew out my short hair, but it’s mostly because I was a lost child without a salon. But now my long hair looks beautiful, and it’s saving me a ton of money! And yet every time I walk by that salon, it’s full of people willing to pay $120 for a haircut and god knows what for color.

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Conquering the “Next Month Will be Different” Mindset

Broken piggy bankI’m sure we’ve all done it at one point or another. We look at our credit card statement and realize we went over budget. When we look closer, we see the culprit: an unexpected expense or a regular, but infrequent, expense. It could be a trip to the doctor, a car repair, a gift for your friend’s birthday, an oil change, a new year’s supply of flea medicine for your pet, etc. And we say to ourselves, “well yea, I went over budget, but now I don’t need to get new flea medicine for another six months, so I’ll be fine next month.” Except next month rolls along and it’s something else.

Your regular expenses may fall within your budget, but if you don’t account for the unexpected or infrequent expenses each and every month, you’ll find yourself in this familiar situation far too often. The solution is to build these types of expenses into your budget, so you’re prepared when they come up, and you’re pleasantly surprised when you go through a whole month with no extra expenses and wind up under budget.

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Don’t Run Your Personal Finances Like a Business

The title of this post probably has you wondering what on earth I’m talking about. In many ways, it’s good to run your personal finances like a business. You should track your spending, project future income, analyze costs, and look for ways to be more efficient. But in one very important way, you do not want to run your personal finances like a business, and that is your income:expenses ratio.

Let me start off by saying I know next to nothing about business finances. So I was shocked as hell when my company’s CFO put up a graph during a presentation that looked something like this:

Please note: this is not real data, I made up numbers to generate the trend lines

Your reaction may be similar to mine. I thought, “how can a business possibly be sustainable if they’re always spending nearly all the money they take in?” My company certainly seems successful, but I started to worry that we were spending too much money and eventually it would catch up with us. I also began to understand why our finance team is always checking the mail to see if any checks arrived and asking me about any bills that might be coming up in the next month for my department. The budget is so tight they need to have an accurate estimate of expenses for the coming months.

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When There’s Not Enough Money – $100 Cash Giveaway

not enough moneyThis week I am participating in a $100 giveaway hosted by Savings Advice. The theme of this giveaway is “When there isn’t enough money at the end of the month”.

A little while back I wrote about how I’m living paycheck to paycheck (sort of). The gist is that I have automated savings set up, so once my recurring bills are paid and money is automatically transferred into savings and investments, I’m left with a very small amount in my checking account with which to pay my credit card bill. Anyone who’s actually living paycheck to paycheck might wonder why I would voluntarily put so much stress on myself to stay within my budget when my cash flow would support much more spending.

The answer is simple: if you’re not at least a little worried that you won’t have enough money at the end of the month, you’ll end up overspending on things like lunches and dinners at restaurants, shopping, and entertainment. If you’ve never experienced running out of money before the end of the month, you’re probably not saving enough.

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Budgeting for 2013

The new year is almost upon us, and that means it’s time to revisit our budgets. Though much is still uncertain when it comes to taxes, it is looking extremely likely that all of our paychecks will shrink at least a little bit next year.

The most likely change is the expiration of the payroll tax cut, which will add 2% to every employee’s tax bill. There hasn’t been any indication that this tax cut will get extended, so you can be reasonably certain this will affect you starting January 1, 2013. The average American family will see their take-home pay drop $1000 next year.1

And then if the Bush tax cuts are allowed to expire, our paychecks will be even smaller. The current 10% bracket will go away, making the lowest bracket 15%. The 25% bracket will go to 28%, the 28% bracket will go to 31%, the 33% bracket will go to 36%, and the 35% bracket will go to 39.6%.2

With all the various tax cuts that are set to expire, the average American family will be paying an extra $3500 in taxes next year.3 We’re racing quickly toward the end of 2012 and no resolution has been reached yet, so we may as well plan for the worst. $3500 per year equates to $291.67 per month.

So what can we do so we won’t miss that $291.67 each month?

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How to Automate Your Savings

Last week I wrote about how I’ve tricked myself into living with a paycheck to paycheck mentality by automating my savings, and encouraged everyone to do the same. I thought it might be useful to talk a bit about how to get started automating your savings. Like many 20-somethings, I had a lot of concerns about automating my savings when I was first getting started. My biggest concern was, what if money automatically moves out of my checking account, but then I end up needing it? In retrospect, it’s easy to see why that was a silly concern, but when you’re thinking about making a big change, everything seems scary and you find any excuse you can to maintain the status quo. But no more, leave your excuses at the door and read on for a step-by-step guide to automating your savings.


1) Track your expenses for three months

Sign up for a program like Mint or Personal Capital (both free) and start tracking your expenses. I currently use Mint, but I understand Personal Capital does everything Mint does plus more. You can view all your expenses by category, so you see exactly where your money is going.

You should also pay attention to how much money you have left over at the end of the month, as this will serve as a baseline for future savings.

What you should learn:

  • Where your money is going
  • How much money you have left over each month

2) Set up an automatic transfer for an amount you can currently swing

If you saved $500 the first month, $100 the second, and $200 the third, err on the side of caution and set up an automatic transfer for $100. The goal is that the money left over after the automatic transfer should put a little pressure on you to keep spending down, but still leave some wiggle room in case their are unexpected expenses. (NOTE: If you didn’t have any money left over or if you spent more than you earned, don’t set up an automatic transfer yet, skip to the next step, and don’t set up an automatic transfer until you can save something three months in a row.)

Where should that automatic transfer go? That depends on your situation. If you don’t yet have a sufficient emergency fund, put it there. Your emergency fund should be with the same bank where you have your checking account. This addresses the concerns I had about automated savings. If you end up needing that money, you can transfer it back into your checking account, and I believe most, if not all, banks will make that money available immediately. If you’ve already saved up for emergencies, I recommend investing in a low cost index fund. I use Vanguard for my investments and have automatic transfers set up for the day after I get paid each month.

3) Set a budget and stick to it for three months

Looking back at your expenses for the past three months, identify areas where you could cut spending. I think at this point it’s too early to put a dollar amount on any category of spending, it would just be an arbitrary number. Instead, look for the categories that jump out at you and budget your lifestyle, not your money. For instance, if you notice that you went out to dinner twelve times per month, substitute one restaurant meal with a home cooked meal each week. If you see that you went to the mall every single week, reduce your shopping trips to once every other week (but don’t buy twice as much stuff!)

What you should learn:

  • That your life didn’t get any worse living on a budget
  • How much money you have left over each month on a budget
4) Increase your automatic transfer
After three months of living on a budget, you should start to see some extra money sitting in your checking account. Again, err on the side of caution and increase your automatic transfer by only the smallest amount you were able to save in one month.
5) Repeat steps 3 and 4 until you’re happy with your spending/saving balance or, if you’re a bad ass, until there’s nothing else you can cut from your budget.
Bonus Step: Every time you get a raise, increase your automatic transfer.