Budgeting: always stay a month ahead

I loved being paid monthly. I know some people hate it because then they run out of money by pay day. A simple bit of budgeting or planning (whichever word you prefer to use) can help with that really (so long as you do have enough money to go around).

Since an internship when I was 20 (quite a few moons ago now!), I’ve been paid monthly. And I have loved it! Without even realizing it, this forced me to always be a month ahead. I would get paid on the last business day of the month, set aside some money for the next month’s spending, and then send the rest to whatever my current savings goal was. Now with being on semimonthly pay, I plan to use part of the first paycheck to cover the next month’s spending and then the second one to savings, so that if I don’t get the second paycheck, the next month is already covered.

The other way that I stay a month ahead is on my credit card. You know how you can charge money on your plastic and then not actually pay for the items until sometimes almost two months later? That’s not how I budget. I follow a similar methodology to YNAB in that the day the money is spent is the day it comes out of my budget. My checking account balance has enough money at all times to pay off all of my credit card balances, even the ones that haven’t seen a statement yet. There’s no looking around for where to get the money when the statement comes. It’s already there.

Once you’re a month ahead, finances are much less worrisome. It doesn’t matter whether you’re paid biweekly, weekly, monthly, semimonthly, or completely sporadically. You add up all the income you received in the month, send some to savings and set some aside for the next month’s spending, rinse and repeat.

My parents always taught me to use one paycheck to pay for some things and the other one to pay for other things and to always pay your credit card before the due date, as in a few days before was just fine. I tried that way for a while and I found it really stressful to always be pulling money out of savings to pay for things you hadn’t planned on when the credit card bill came, so now I do things this way. I budget a bit (but I’m not very hard on myself at all if I miss the target) and have the money to pay the credit card statements in my checking account long before they come due. It’s freeing!

Edited to add: I’ve gotten a fair number of comments in recent months asking if I budget. I wrote several detailed posts on this back in April 2012. I’m still using the same spreadsheet, but the numbers are a bit different.

  1. April 2012 Spending Plan
  2. How I Made My Spending Plan
  3. April 2012 Spending Plan: Conclusion

Looking back at those posts made me realize that I don’t forecast for home maintenance or long-term car maintenance. I also don’t have a plan for what I’ll do to replace my car. My current assumption on the latter is that I’ll have the mortgage paid off then and will just sell some taxable investments. For home maintenance though? I’ve definitely had to do some replacing. Honestly, I just keep a larger cash buffer to help with that.

Readers, how do you pay your credit card bills? Are you more like me or my parents?

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42 thoughts on “Budgeting: always stay a month ahead

  1. I pay my CC periodically as soon as I see a built up more than a couple hundred dollars. There’s a lot of cognitive overhead for me letting it go higher and subtracting it from my checking account value and determining how much I really have.

    Also, pssst, I sent you an email on this but I nominated you for the Sunshine Blogger Award.

    • Yes, sorry! I’ve been trying to avoid the computer the last few days. I did see the email.

      My credit card bills can get up to $2,000-5,000 sometimes and I’m totally fine with that because I know the money is there. And that way, if I needed to, I can take advantage of the credit card float of almost two months sometimes. (But I haven’t needed to.)

    • Though I also don’t list purchases or account for them when spent. I let the CC company keep track and only look when we get the bill or I need to know for planning purposes.

        • I just added some links to my April 2012 spending plan posts that made your head spin :) I feel like the “How I Made My Spending Plan” one was pretty good and is still reasonably applicable. Honestly, looking at it, I do something super similar to YNAB, which didn’t exist at the time! Now I wish I’d made and distributed that software application.

        • It still makes my head spin!

          I’ve found that I’m doing a LOT of trying to minimize the decisions and detailed tracking that I have to do in all areas of life that aren’t directly work. Like the main reason I hate taking the bus isn’t that it adds 20 min to my commute each way, but that I have to pay attention so as to pull the damn cord at the right time so I get off at the correct stop. Similarly I have systems for getting dressed and picking meals and so on.

        • Ugh yes I hated that part about the bus too! We’ve been improving the systems for picking meals (we got a crock pot recently) and I’ve been trying to make my wardrobe less complicated since no one cares what I wear to work.

          I honestly don’t make that many decisions related to my budget any more – it’s all on autopilot really. And tracking is relaxing for me, otherwise, I probably wouldn’t do it.

        • Interesting :) I find organizing relaxing as well, which is part of why I find tracking/organizing my finances relaxing. I’m guessing you don’t finding tracking relaxing because it is something that either has to be done regularly or not at all whereas you can alphabetize the books/spices whenever you want without needing to do it?

        • I find organizing my finances relaxing, so I like doing the beginning of the month check writing and moving things around to different accounts. But I do not like having to make decisions about what to put in spending categories on a fine-grained detail. I don’t like the loss aversion I feel when I don’t get to do something I want because I didn’t plan for it in advance when I could afford it if I’d just made categories differently (which causes me to then never buy anything so I will never feel that loss– it makes me spend too little). This is why DH has an allowance and I have more of a backward looking system and I spend a lot less on random stuff.

        • That’s part of why I’m against zero-sum budgets. It’s impossible to predict all of the things that I’ll need/want during a month. For example, I just had to pay for new lenses in my glasses. I didn’t know that was going to be necessary when I started the month of August. My budget at this point mostly covers the things I know about and I don’t worry about the things I can’t predict – I just reduce the amount going to savings at the end of the month to cover that.

          Once the mortgage is paid off, I want to experiment with not budgeting and see how that works for me.

        • At this point even our “emergencies” are pretty predictable, not what they are going to be, but how much they’re going to cost on average. So we really only have to think about the big stuff (like, for example, taking a half pay cut and moving someplace that is 2-3x as expensive for the year).

        • Yup, same. My average spending for the previous 5 years (2010-2014) was $45k. I’m on track to spend ~$43k this year at the moment. There’s no real need to for me to budget at this point. Since I don’t escrow my property taxes or insurance, those irregular costs are pretty high (I pay property taxes in two installments each year and each one is ~2x my mortgage payment and then insurance is another 1x mortgage payment), so I’d feel more comfortable with not budgeting and just keeping a buffer without the mortgage payment.

        • Since I don’t get paid in the summer, I do keep a running tally of how much extra we have in savings each month compared to the money needed by my last paycheck (estimated summer expenses above DH’s salary + school tuition for kids + emergency fund). I also estimated how much we would need to pay for this year of riotous living plus a bigger emergency fund just in case. So I’m not completely spreadsheet free.

        • “So I’m not completely spreadsheet free.” :) I always wondered how you were so organized with your finances without any spreadsheets!

        • … come to think of it… a lot of the month to month “budgeting” that I do is really on the margin stuff– I compare inflows to outflows after skimming off the top and pay a lot of attention to transfers between savings and checking to keep an idea of how much my spending is deviating from normal. I wonder if the focus on flows rather than stocks is because of my economics training. I mostly ignore my net worth unless I’m feeling anxious and need a scrooge mcduck moment.

        • I mostly look at the “flows” too and not too much how the stocks are doing. That’s one of the things I like about anonymizing my investment categories a bit for the blog – it forces me to look at my investments as a whole, rather than the change in each account, which is much healthier.

  2. Interesting approach. I don’t really think of a direct correlation between a specific paycheck and my expenses. My paycheck goes into my checking account, which then is used to pay for expenses. When the balance gets too high, I move some into my investments. Its a different approach, but it works well for me and ensures that I never have to worry about having enough cash on hand.

    • Heh I contemplated letting my paychecks pile up in the income savings account until the end of the month, but I’d rather move money to savings as soon as I can because I find that fun ;) In reality if you get paid $X twice a month, your expenses are $X – $Y where $Y > 0, and you live on your last month’s income, then your first paycheck is really covering your expenses, plus some to savings, and the second paycheck is all to savings.

      Your approach is more similar to my boyfriend’s. I would probably do that if I didn’t follow a budget at all.

  3. Great articulation of this concept! Having started off my life with monthly pay and being a month ahead (not using a cc at all), I view bookkeeping any other way to be excessively complicated. I’m glad that Kyle’s new job pays him monthly as well.

    • Yeah I was a bit annoyed by not being on monthly pay anymore because it was just so simple! One of the other companies I had an offer from does biweekly pay. Semimonthly is kind of nice in that it’s the same amount each month and I can earn a little bit of interest on the money / invest a bit earlier. For example, my 401(k) contributions are now being dollar cost averaged twice as frequently as they were before.

  4. I’m working at my first full-time job, and my company pays monthly as well – originally I thought this was a bit frustrating, but it’s actually been a lot easier for me to see how much money comes in and out each month. Like you, I like to keep my checking account ready to pay off any credit card bill or rent needed, and I really like to pay my credit card statement as soon as it comes in. Otherwise, there’s to much anxiety about forgetting to pay it off altogether by accident!

    • Nice! Back when I paid every bill manually, I paid them as soon as they came in. I have them all on auto pay now though, including my credit cards, so that I don’t forget to pay any of them.

  5. I get paid biweekly which makes managing cash flows wonky. Two months a year are 3 paycheck months which feel like bonuses! I always pay my credit card on the due date. Best way to manage your float! Why pay back an interest free loan early?

    • I think in that case, I would make a “budget” of how much to spend/save from my monthly income assuming two paychecks and then use the third paycheck in the months where one comes entirely for savings. They would totally feel like bonuses! I would be able to do that though since I live off of only a small portion of my income. I think higher spending people use their third paycheck for irregular expenses?

      I don’t use the float per say in that I don’t wait to set aside the money to pay for something until I get the statement, but I do like using the float for say getting money out of my HSA or if there was an unexpected expense that I can then wait until the end of the month to reconcile it, like when I almost bought a new fridge AND a sink last month! (I ended up just buying the sink.) Or just having the float around just in case, you know? Or for me earning interest on the money in the meantime, like when I was leaving it in a rewards checking account! I’ve actually debated using an Ally “savings” account as my cash flow account if I could get my transactions down to fewer than 6 per month haha!

  6. My credit card strategy is way different. Up until I was almost 30, I never had a credit card. Then my wife and I started churning credit cards hard for travel points. This resulted in having anywhere from one to two dozen active cards at any one time. To make things easier payment-wise, I do a sweep around the first of the month and check every single card and schedule payments for them, usually a few days before they’re due. Sometimes I’ll have to move money from savings to cover temporarily, but I reimburse that cushion soon after.

    • No credit card until almost 30?! Bananas! I’m not even 30 now :) I got my first credit card post-college and it took a few years to build up the excellent credit that I have now. I use credit card auto payments now since I find that easier to manage. I love that with a Chase credit card, you can pay it down early if you want and they’ll reduce the automatic payment. My current main credit cards (Barclaycard Arrival and Fidelity American Express) don’t have that feature, so I just let the automatic payment go through. I do often pay down the Chase cards early, especially since I end up with low balances on them!

  7. I used to literally pay off my card like every other day. Literally.

    Nowadays it’s more like weekly.

    I don’t know that I have a preference for pay frequency (http://nzmuse.com/2013/03/paycheque-frequency-whats-your-preference/) – my MO is to put it all into savings and then pull out a weekly amount. But the actual day can make a difference. eg i have all my payments set up to go out over the middle/end of the week because i used to get paid on Tuesdays. I just changed job and now get paid on Fridays, which is annoying!

    • Oh gosh yes I knew people in college who would buy something with their credit card for the points and then immediately send a payment for that amount once they got home! That seems like a bit too much work to me! At first, I did manual payments a few days before the due date. Then I would pay them off all at the beginning of the month, like Norm above. Now I just leave them on automatic payments so I don’t have to worry about them getting paid.

      It’s so bizarre to me that everything you guys do (paychecks, rent) is weekly! I understand that it’s a different country and part of the world, but it seems like such a foreign concept to me! Maybe you should change all your payments to go out on Mondays then if you get paid on Fridays now?

  8. Never thought about it before as budgeting a month ahead, but I like how you describe it. We’re in the anti-budget camp, but obviously you still have to plan to spend money and know where it’s going to come from! The tough thing for us, re: credit cards, is that 80%+ of our monthly charges are for work expenses, and those aren’t predictable, and we aren’t always sure when we’ll be reimbursed. This won’t be a problem after we retire in a few years, but for now, it sometimes forces us to take money out of our slush fund to cover the CCs, and then we pay ourselves back when work reimburses us. Not the best system, but the plus side is that we get loads and loads of free airline miles by charging all the work expenses!

    • Work expenses were actually why I created an emergency/slush fund in the first place! I would get tired of it if I had work expenses all the time though!

  9. As far as credit cards go, I have all of my accounts set up in Quicken, and I have entries set up a month or two ahead of time. That way I know how much is coming in (like my paycheck), and how much is going out (like credit card payments and mortgage payments).

    AS I balance my finances in Quicken, I periodically review how much I expect my credit card statement to to be. That way I have a good idea on what my account balance is expected to be on any given day.

    As backups, I have my credit cards automatically set up to pay my monthly statement in full on the due date. That way if I forget to initiate a payment the credit card company will do so for me so that I will not have any interest charges or late payments.

    My checking accounts are set up with overdraft protection so that way if I make a mistake the bills would be paid, I wouldnt have any and I wouldn’t harm my credit etc.

    As far as budgeting goes, my wife and I use Dave Ramsey’s Everydollar app to do a zero based budget. Although we do a zero based budget, I have set up most of main accounts to be ‘funds’. That way as an example I can put money into a car account that accrues savings for life insurance that is paid quarterly, or clothing which we buy something every 3-4 months, or our new car savings/car repair fund. That way we have money saved up when we go out shopping, or have enough money set aside if we have an inordinately large car repair bill.

    • Autopay was less necessary back when I had 1-2 credit cards. Now it’s really helpful when I use whichever card is the best for that purchase and I know it’ll eventually get paid out of my checking account exactly as it should.

  10. […] Do you budget?  MSN Money used to have a fantastic post of Liz Pulliam Weston’s about when it’s ok to ditch the budget, but unfortunately that post has gone to the ether.  Nick from Step Away From the Mall did a nice summary of her post that you can read here, though he notes that this list is really a general budget, just not a detailed one. And here’s bit of a personal post (from when DH was unemployed and we had to keep a tighter rein on spending) in which I talk about how much I hate budgeting.  You can also combine a loose budget with tighter monitoring of spending as Leigh (who doesn’t need a detailed budget but enjoys tracking her money) discusses in this recent post. […]

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