I’m currently grappling with some challenges related to budgeting my biweekly paychecks, and I’d love to hear how others have tackled similar situations.
My pay schedule involves a two-week lag, meaning my most recent paycheck on Jan 4 covered the period from Dec 9 to Dec 22. This arrangement results in two main issues for me, and I’m interested in how others have dealt with them.
- Frequency of Pay Periods: Since there are 26 pay periods in the year, two months end up having three paychecks. I’m currently using the Savings Budget template with monthly income calculated as (26 * biweekly pay) / 12 to smooth this out. However, I’m curious to know if others are using a similar strategy or if anyone is calculating the number of periods in each month. What are the pros and cons of each approach?
- An obvious issue I see with the ‘smoothed out by the savings budget’ approach is that it falls apart pretty quickly if you change jobs or get a pay raise mid-year.
- Accrual Accounting and Annual COLAs: Earnings are accrued several weeks before they are paid, posing a challenge, especially at the beginning of the year with annual Cost of Living Adjustments. If I budget my income by accrual accounting (which is much easier to calculate), my salary increases on Jan 1, and accordingly, my budgeted income for January should rise. However, due to the lag, the pay I receive in January was mostly accrued in December, leading to a shortfall compared to the budget. How have you navigated this situation? If it was a one month lag, it would be easy enough to budget income one month behind. Instead, the two paychecks I’ll get in January will include 15 days of 2023-rate pay and 5 days of 2024-rate pay, but that ratio changes year to year.
Maybe I’m missing what you are trying to do here, but why don’t you just build your budget based on the income you’ll be receiving rather than when you completed the work to earn the income?
In terms of the 2 months with an extra paycheck, I get paid weekly and run into the same issue where I end up with 4 months a year with 5 pay periods vs. 4. I have a number of budget categories that are sinking funds where I am saving monthly for annual expenses. I’ll use these “extra paycheck” months to budget more against the sinking funds so I don’t let my monthly expenses balloon in those 4 months.
I think I’m with @derek.john.steele on this one. If I understand the situation correctly, it’s a choice between trying to have compensation align with when the work occurs and smoothing out your income over the year versus budgeting consistent with cash flow. Personally, I’m a fan of the latter. I’ve tried the former before, and I always get frustrated that my budget doesn’t reflect my cash flow.
@derek.john.steele So if I understand correctly, you budget as though there were only 48 pay periods, and then put the extra into your sinking funds? On a technical level, do you put the same value into the categories tab for each month, or do you figure out which months have 5 periods and adjust the budgeted income for those months? If the latter, is that a manual process or do you use a formula?
@dmetiller I would say its less a matter of “trying to have compensation align with when the work occurs” and more that that is (in my mind) the only obvious easy way to do the tracking. For example, say my take-home salary for 2024 is 120k. 120/12=10, budget 10k monthly, done.
Except, as you point out, then the budget doesn’t reflect the cash flow, which frustrates me as well. How do you resolve that? Do you sit down with the payroll calendar at the start of each year and calculate out when each paycheck will occur and how much you expect it to be? Do you use a formula that derives the right number of pay periods based on the month?
Honestly, I just kind of roll with it. I use the Savings Budget sheet as my main budget sheet with what I think what would be considered “envelope budgeting.” Some months the envelope winds up having more money in it; some months less. I’m fortunate to have enough margin where it doesn’t make a huge difference to me, but what I wind up caring about is making sure that I’m comfortable with the amount of cash I have on hand. Thus, the emphasis on cash flow. Plus, between my job (in which I get paid monthly and two months are typically lower than the others) and my wife’s job (biweekly pay but with a couple of unpredictable bonuses), it would just be hard to plan anything at the beginning of the year as opposed to rolling with it and adjusting over the course of the year.
Yes. I’ve set my budget based on 12 months with 4 paychecks per month. It’s pretty easy at the beginning of the year to look at the calendar and determine which months I’ll be a 5th check, so I adjust the category page to account for a 5th paycheck that month. No formulas necessary.
I don’t get too hung up on perfection within the categories page. We’ll have months where we go over some categories and/or total, and some under. But we’ve built in enough margin that we can manage it over the course of the year.