Monday, August 10, 2020

Are you are living paycheck to paycheck? Here's the sensible way to stop.

Do you live paycheck to paycheck? If so, the reason may simply be that you've not been shown how to live any other way. This is perfectly normal since you probably didn't receive any effective training on everyday money management while you were in school.
After school you entered the workforce with the idea of getting a paycheck. When the paychecks started coming in, you defaulted to the obvious steps for handling your income.

  1. Get a paycheck
  2. Pay the bills that are due
  3. Use what's left over for spending money until next payday
  4. When money runs short between paydays, use credit cards
After accumulating some debt, you may have begun to wonder how best to get debt free. From your searches on the Internet, you learned that monthly or paycheck budgeting and expense tracking are the preferred ways to get control of your finances. So you decided to give it a try.
It wasn't long before you realized that deciding in advance how you will spend what's left of each paycheck is unrealistic. Keeping track of every penny you spend, after paying the bills, is way too difficult, time consuming, inflexible and just plain frustrating. You discovered the truth that micromanaging your spending money (3 above) each payday does nothing except add stress to an already stressful situation.

So, like most people, you gave up. You are not alone in your opinion of monthly and paycheck budgeting. There are over 40 million households in the U.S. that live paycheck to paycheck because the budgeting of spending money and the tracking of expenses don't work for them either.

My story

Lois and I were married in 1964. Our finances followed the same pattern for the first eleven years. We entered marriage with no idea how to effectively manage our income to support a growing family. We ended up with a sizable debt load. I tried budgeting. I tried consolidation loans. I pestered relatives. Nothing worked.
Then, in 1975, I had an epiphany. While paying bills one month it occurred to me that what I had been doing on scratch paper each payday could possibly be organized into a set of forms. After experimenting for a couple of months, I developed a pencil and paper system that quickly smoothed out our spending money and helped me pay our bills on time. My new system helped several other families as well.
Fast forward to 2000. After a friend asked for help with her finances, I got the idea for writing a program to make my system available to anyone. I had no idea about the sheer complexity of the task that I was undertaking. It took me 20 years of trial and error to fully understand how everyday money works and to create software that works the same way. With no reference material or mentors available, designing the program took much digging, reflection, learning and creating new technology.
For me, it's been a long journey. For you, not so much. The program that I developed, Income Companion: Incredibly Cool Budgeting, has everything you need to correctly manage your household finances yet is easy and simple to use. To get you started, we will take a look at your everyday money and how changing a couple of your money habits will set you firmly on your path away from living paycheck to paycheck.

Your everyday money

A discussion of everyday money starts by listing its six parts in the optimal order that you will want to be doing them.
  1. Receive income
  2. Pay for out of pocket expenses (spending money)
  3. Pay bills
  4. Manage credit cards
  5. Set aside sinking funds
  6. Set aside short and long term savings

These are the basic elements of anyone's everyday money. Without exception, these six parts apply to everyone regardless of their level of income.

When you are living paycheck to paycheck, typically not all of the six everyday money elements come into play, nor are they done in the optimal order.

1. Receive income
3. Pay bills
2. Pay for out of pocket expenses (spending money)
4. Use credit cards

In addition to the steps being out of sequence, credit cards are only used instead of being managed. This is the typical cause of continually increasing debt when you are living paycheck to paycheck.

Doing step 3, paying bills, before step 2 is a critical issue. The primary reason people get into trouble financially is that they do not control their spending. By first paying bills and then putting whatever is left in their pocket to spend, the amount of spending money is dependent on the amount of bills that have to be paid. In addition to making the amount of spending money variable between paydays, like a roller coaster, it is normal for all spending money to be spent before the next payday.

Each payday becomes an independent event in which the entire paycheck goes to paying bills and spending money. There is no holding over of cash from one payday to the next.

Changing money habits

Making the switch from living paycheck to paycheck to not living that way is not a matter of changing what you do. Adding monthly or payday budgeting and tracking expenses is not the answer. Neither of those methods are a natural fit for the way your everyday money works. Getting out of the paycheck to paycheck habit is, instead, a matter of changing both how you view your money and then changing your habits to match your new view.
You stop living paycheck to paycheck by making three simple changes to when and how you handle your money.

1. Sync income and outgo

There is no standard schedule for paydays. Every business and government agency sets their paydays to best fit the organization's needs. This means that when you receive money could happen at any time depending on who is issuing your paychecks. Your income can happen whenever.

On the flip side, your outgo (bill and credit card payments) are on a monthly schedule. The businesses to whom you owe money tell you on which monthly day your payments are due. All of your outgo events, therefore, are on a dependable, monthly based schedule.

This mismatch between the scheduling of income and outgo is one of the symptoms of living paycheck to paycheck. The bills that are due on any given payday could be different every payday. Planning becomes difficult, if not impossible, when the bills you have to pay come due on different paydays each month.
The solution to bringing your income in sync with your outgo is to switch your planning from when paydays happen to when bill and credit card payments happen. In other words, you plan your finances on a monthly schedule just the way that the people you owe schedule your due days. You do this by scheduling when you will be paying bills each month.
Paying bills once a week does not work because the number of complete weeks in each month varies. And paying bills monthly is too infrequent for planning purposes. Paying bills twice a month, on the 1st and 15th, works out to be the best compromise for scheduling payments. 

  • On the 1st you pay all bills that are due on the 1st through the 14th.
  • On the 15th you pay all bills that are due on the 15th through the end of the month.

This twice monthly bill paying schedule gives you a solid foundation for also planning the other five parts of your everyday money as shown below. The Look Ahead page in Income Companion is where all of the money events in your Incredibly Cool Budget are automatically scheduled twice monthly. (The "New cushion balance" row is your bottom line that shows you if there are any coming shortfalls (e.g. in the 9/15/2020 column) that might need attention before they become immediate problems.)

An option on the Look Ahead page lets you change the 1st and 15th monthly days to better fit your lifestyle.

2. Ignore paydays

With your bills scheduled for payment twice monthly, when you get paid is no longer important. What matters is how much money you will have available on the two days each month when you pay bills.

Income Companion automatically calculates and schedules your expected income receipts. The AutoDeposit feature alerts you when a receipt is due by displaying the Deposit dialog box at right when you start the program. After verifying that the deposit amount is correct, two clicks records the deposit. (The program maintains the transaction register for your checking account.)

The "Expected to be available" row in the above Look Ahead graphic shows the total in each column of:

  • How much on hand, non-earmarked cash is expected to be in your checking account,
  • How much cash has been earmarked for specific bill and credit card payments, and
  • The total of all expected income receipts since the previous column date (less any percent of income saving set asides).
When your bottom line number in a Look Ahead column is black (positive), you will have enough money available to pay the scheduled bill and credit card payments as well as set aside the scheduled amounts for your sinking funds and saving plans. There is no reason why you cannot make all the scheduled payments on the column date.

3. Control spending

After you start ignoring your paydays, you will no longer be getting spending money from each paycheck. You are free to set a schedule for your spending money that works best for your lifestyle that is not only independent of paydays, but, can also happen more frequent than paying bills twice a month. You can give yourself a weekly allowance on a weekday and in an amount that works best for you.

How you spend your allowance is entirely up to you. In addition, you neither budget your allowance nor keep track of how the money is spent. The goal for a weekly allowance is simply to have just enough money that lasts you until you get your next allowance. If you consistently have money left over each week, your allowance is too high. Conversely, running short each week means you need a larger allowance.

With a consistent allowance amount, the impact of your spending money on your cash flow becomes consistent. You will no longer be draining your checking account between paydays by spending your entire paycheck. With your spending controlled, you could begin to see two beneficial side effects.

  1. Since you will never be more than six days from your next allowance, you may see a decline in your credit card usage.
  2. You may start to see your checking account balance growing month to month.

In Income Companion you set up your allowance as shown in the Allowance dialog box above right. In this example you can see that Lois and I give ourselves an allowance of $250 each week normally on Thursday. Our total amount of allowance money for each coming month is set up to be automatically set aside by the program on the 1st as part of paying bills. Since there are normally 4 Thursdays in each month, the normal allowance set aside amount is $1,000. However, there can be 5 Thursdays in a month which increases the allowance set aside amount to $1,250. (See the "Allowance set asides" row in the Look Ahead graphic above.)

With the allowance set asides being done automatically for each new month, my part of the allowance feature is to get our allowance each week. In the Get Allowance dialog box at right, I have all the options needed to take a week's allowance and move it where needed.

Lois normally writes a check for our full weekly allowance amount. She puts the cash in her wallet. To record the check, I use the "Amount for which I wrote a check" textbox.

Get started

If you live paycheck to paycheck and would prefer to live a more authentic money life, click here to download Income Companion: Incredibly Cool Budgeting and get started. It only takes an hour or two to add your everyday money information. In that amount of time you will begin to see, probably for the first time ever, a clear picture of your future cash flow. That's a powerful picture that can help you find and make any changes in your spending plan that will bring your plan more in line with your dreams and goals.

Making the changes in your money habits as discussed in this post will come to you naturally when you start using the only software product on the planet that works the same way your money works. Within three months of using Income Companion: Incredibly Cool Budgeting you could be well on your way to living the life you love with a money management tool that will support you all the way from now to retirement and beyond.

So ... are you ready to stop living paycheck to paycheck? The ball is in your court.

Are you are living paycheck to paycheck? Here's the sensible way to stop.

Do you live paycheck to paycheck? If so, the reason may simply be that you've not been shown how to live any other way. This is perfectl...