Are you budgeting your paycheck?
Paycheck planning is vital if you want to take charge of your finances, especially if you have debts to pay off. But if you’ve never sat down and budgeted before, you might not know where to start.
Don’t worry, we’re here to help! Read on for our guide to the power of paycheck planning.
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Getting Started with a Budget
When the word ‘budgeting’ comes up, a lot of people want to shrivel up and avoid it. You may imagine yourself getting buried under spreadsheets. Or having to deny yourself the things you love.
The good news is, budgeting (or paycheck planning) isn’t that scary. It’s flexible and is only as restrictive as you want it to be. What it’s especially good for is getting you out of the loop of living paycheck to paycheck.
Understanding the Budgeting Process
Below we’ll go through the steps to put together an effective budget for your needs.
Figure Out your After-Tax Income
Your regular paycheck states the amount of pay, and the deductibles it’s subject to. These include 401(k) savings, health/life insurance, and taxes. It’s important that you add those back in to get a better picture of your finances.
If you’re getting income from side jobs, make sure you take out any taxes or business expenses that reduce it. This part is about understanding your finances and what you’re paying out for.
Choose a Plan
Your budget plan needs to cover all the needs you have, some wants, and savings. Savings are key for the future and cover you for any emergency expenditure you might have. Like the car breaking down, or needing to replace the washing machine.
Subtract the Fixed Expenses
Start with your after-tax amount. Take away the expenses that occur within the period of receiving a paycheck and getting the next one. These should be the fixed expenses you have to pay and will include:
- Car insurance/gas
- Utility bills
- Internet/phone bill
- Life/health insurance
Once you’ve taken out the things that you have to spend on, make a note of the figure you’re left with.
Subtract Your Discretionary Spending
This should focus on the ‘wants’ you plan to have from the day you get paid to the next paycheck. These aren’t essential, but they’re your quality of life spends and could include:
- A planned trip out
- Eating out/date nights
- Drinks with friends
- Cinema trips
- Concert ticket
Once you’ve taken out your planned ‘wants’ spending, make a note of what you’re left with now.
Fund Your Savings & Rainy-Day Funds
Having savings is key to your future. You might want to save up for that grand family holiday next year. Or you might be saving up for your house deposit.
You always want a rainy-day fund that will cover any emergency spending so you aren’t caught short. For example, having a pot of 1-2 months rent/mortgage is a good rainy-day starting point.
Break down what you’re saving for and set aside an amount for each savings category. These categories can include:
- House deposit
- Emergency expenditure
Even if you’re only saving $20 here and there it will add up in the long run. The longer you do it for, the more of a safety net you’ll have. And if anything, it’ll break big payments like Christmas presents up into smaller ones.
Don’t Forget About Your Buffer
You should leave a buffer amount too of between $50-$100. You leave this in your checking account at the end of each paycheck. It’s to cover those “oops” moments. Your account should never get to $0.
Now you may have an amount of money that’s leftover and so far isn’t allocated. Before you throw it into your savings, make sure your next paycheck is going to cover your expenses. This is especially key if you have a varying monthly income.
Use What’s Left to Boost Savings, Investments or Pay Down Debt
You’ve already allocated payment for your debts and required spending. But by using what you have leftover you can pay down your debts faster, taking some pressure off. Or, you can use this money to boost your savings and provide that little extra security.
Spend with Intent
What if your income isn’t enough to meet your needs? Or what if you want to buff your “wants” or savings? You’ll need to boost your income, or you’ll need to cut back your expenses.
A good way to reduce expenses is to take a more mindful approach to spending. This doesn’t mean you can’t spend for fun. It does mean you’re paying attention to what you’re spending out on.
Once you’ve found areas you can make savings on, start thinking about where and how you spend your money. Take into account your larger financial goals and values. Do you want to invest more, have a better pension plan, or save for a house deposit? Things like that.
You might want to focus on the environment by buying sustainable products. Or you could want to shop with more local or minority-owned stores. They might save you money, or cost more, it depends on your goals. But if you can fit them in and they matter to you, they should be in your plan.
Spend What You Have
If money gets tight, it’s easy to fall into the mindset of “I’ll chuck it on my credit card and pay it off later”. Or you might borrow from friends and relatives with the plan of paying them back.
It might sound like a good plan at the time, but you’ll soon get stuck in a cycle. One you’ll struggle to break. It’s important to get back to spending only the money you have. This way, you’ll be closer to breaking the cycle of living paycheck-to-paycheck.
It might mean short-term aggressive expense trimming, but it’ll be worth it in the long-run. You won’t be borrowing here and there from future you. And it doesn’t have to be all in one go.
Don’t Miss Out on the Benefits of Paycheck Planning
So there you have it! These are some serious benefits of paycheck planning that you don’t want to miss.
The main thing to remember is not to shy away from money talk. It isn’t a scary topic you need to hide under the covers from.
All you need to do is stay focused, keep ahead of your paychecks, and understand what you’re spending. A good understanding of this will help you plan out a more sustainable financial future.
If you need a personal loan to balance your books and consolidate your debts, contact us today at Bonsai Finance. We can connect you to the best lender for your needs to help you improve your financial situation.