How to Cope With a Changing Payday Cycle
A change in a payday cycle can throw a real monkey wrench into your financial planning. Learning to make money last for an entire month or to meet all your expenses on time with staggered paychecks can be a challenge. Here are some ways to alter your money management style if you are struggling with adjusting to a more or a less frequent paycheck.
First things first: Examine your spending plan
No matter whether you get paid once a month, twice a month, or every two weeks, it all comes down to having a plan for your money. Once you know where your money should be going over the course of a month, it becomes a lot easier to figure out the timing aspect. So begin by tracking your income and expenses and creating a spending plan. A spending plan worksheet, online money tracker or mobile app can help you get started out. A good spending plan not only allows you to meet your expenses, but also helps you save for your goals and know how many “treat yourself” expenses you can afford.
Examine how you think about your paycheck
When you get a paycheck, do you already think about all the ways you can spend it? Or do you find yourself just hoping the money will last until the next check comes? If so, you may want to re-examine how you think about your paychecks. Once you have a spending plan, the next step is figuring out what you want to achieve with your money. Write down your short-term, mid-term and long-term financial goals and how much money they require. Next, figure out what you have in your savings, the pay periods or months until the target date, and the savings you’ll need per pay period or per month to achieve your goal. You can make your own worksheet or use a financial goals worksheet. Instead of just trying to make the money last or cover your expenses, think of your paycheck as a way to get you closer to achieving those goals. Goal-setting resources online, such as the Dream It and Achieve It mini-site, can help guide you in getting your own plan in place.
Here are some techniques for putting that paycheck to work for you:
The calendar approach
One potentially difficult aspect of multiple paychecks in a month is having bills due on different dates and not having a lump sum at the beginning of the month to divide among the bills. To combat this problem, open a calendar and record all your bills’ due dates for next month. Then you can use the timing of the bills to determine which bills will be paid with which paycheck. It is best to try to even out the total amount due for the bills for each paycheck. If it seems like too many bills might be falling in the period for one of your paychecks, try to pay some early in order to spread them out to make them more manageable.
The envelope system
Before computers, many families used paper envelopes with cash in them to separate out the money that would be going to particular bills. The goal is to control spending by setting aside budgeted amounts for each category of bills into separate envelopes. With this method you would have an envelope labeled for each bill like your rent, insurance, utilities, etc. When a need arises to spend money, you use the money out of the appropriate envelope. While you could still do that if you feel most comfortable with it, for many people it is best to not have large sums of cash lying around the house.
A more secure option would be to use different accounts with your financial institution or prepaid debit cards to assign money to certain bills. You can even have direct deposit into the separate accounts. However you decide to set up the accounts, the key is to have one account set up specifically for bill payment money. And if you have already done a spending plan, you should have a pretty good idea how much money you will have to pay those bills as well as your other expenses.
If you have multiple monthly paychecks and don’t have enough money in the first one to cover all your bills, you can use a “half-and-half” approach. First figure out the total amount you pay on bills each month. You can automatically have half of that total put into your “bills” account with the first check and then the second half put in when your second paycheck comes. If you get paid weekly, you could put in approximately a quarter of the amount each pay period. If you want to make it even easier, set up automatic payments of the bills from your dedicated account.
The credit card method
The Credit CARD Act of 2009 dictated that credit cards now must have a 21-day grace period. In other words, you have 21 days to pay off any charges you made on the card before interest can be added to the bill. If you are having trouble coming up with the money to pay a certain bill by the due date, putting the charge on a credit card will buy you some time. However, this approach takes discipline. You must pay off the credit card balance within the grace period or, in the final analysis, you will end up paying more for the bill because of the interest charges. It is also vital to avoid using the credit card to pay for non-necessities. When deciding which credit card to use to pay a bill make sure to consider the fees. Compare cards to find the right fit for you. Make sure to compare the Annual Percentage Rate, grace period, credit limit, annual fee, and late fee. Or use a Credit Card Search Checklist worksheet to help you make the comparison.
This is the easiest technique to manage once you get it going, but it can also be the toughest to start. The concept is to get enough money in the account you pay bills with to not have to worry about potentially overdrawing. Ideally, you would want to have at least half your total monthly living expenses as a floating balance in the account you use to pay bills. That way, if you get multiple paychecks each month, you should have enough to cover your bills for the month when you get your first paycheck. Then you don’t have to stress about making it to the next paycheck. However, this can be easier said than done if you are living paycheck-to-paycheck. But when you do your spending plan, make a list of items you could eliminate or cut back on for 1-2 months. By making some small sacrifices for a few weeks, you could set yourself up for years of less worry.
Avoid salary advance or “payday” loans
While the idea of getting money based only on a promise to pay in a few days or weeks can sound attractive, be aware of the consequences of having to pay extra money to get caught up on bills. Needing salary advance loans more than once a year is generally considered a sign that your personal financial plan needs some adjustments to create more savings for unexpected expenses.
Try the above methods before turning to salary advance loans. If you find that none of these techniques work for you, contact your financial institution to see if they provide loans with relatively low interest and other terms that make them a better option than salary advance companies.
Switching to smaller paychecks more often or larger paychecks less often can take some adjustment. But developing a plan for your income will help you take the change in stride and may even lead to a better personal system for maximizing your money.
Revised January 2016.