For the last two years, I’ve been nailing my debt. This accomplishment has been, in the most part, because I set up and stuck to a budget. But something has gone horribly wrong.
At first, I thought it was obvious what the problem was. But, looking a little deeper into my budget I’ve had something of an epiphany.
If you’re keeping a monthly budget, or you get paid on a monthly basis and find yourself running dry at the end of the month, I’m about to turn your world upside down.
Hopefully, for the better.
Just a few months ago I decided to take a month off of sticking to my budget. I wrote about that month. The title was aptly named, ‘When to avoid overspending and when to say F#*k!’. It detailed my need for a brief break from living frugally on a tight budget.
It wasn’t that I didn’t keep to my budget, but I allowed myself to step over a firmly kept line to enjoy some little luxuries with my partner and my son during Christmas.
There’s a lot to learn from this post, there’s something really psychological at the core of what I’ve learned since then.
In order to set yourself up for success when paying off debt fast, you need to factor in the milestones where you reward yourself. So I’m not saying I was wrong to unshackle the curb on my spending for a short period of time.
I still stand by that post, completely.
But this month, this one month, laid waste to those habits.
I experienced a ricochet of disruption into the month or two that followed.
For me, Christmas was the perfect time to do this. I was fortunate I had some cash in my hand, I had some time off work, and time with my son. I wanted to enjoy a little freedom during the Christmas break. Throughout the year I had stuck to my goals and achieved them. In short, I felt I deserved a breather.
No; I did deserve a breather.
However, I struggled to stick with my budget since then over the last two months, particularly in February.
Now, It’s not that I haven’t been managing my budget on my normal weekly basis. It’s just that I have been finding it harder to keep to the budget after some downtime.
Toward the end of each month, I have found I have been short of cash.
I found my bank balance fell empty a whole ten days before I was next going to be paid.
That’s almost a third of the month without any funds!
Something was knocking me off kilter.
Fortunately, keeping a budget helps you scrutinize your finances and your spending habits very easily.
Naturally, I thought it was because I’d gotten into some bad habits. And yes, that maybe had something to do with it. But I wasn’t convinced it was all because I took a breather for a couple of weeks.
Still set on achieving my financial goals this year I’ve taken a good, hard look at what has been going wrong. So, I looked a little bit deeper at my spreadsheet. And do you know what I found?
It’s really quite odd.
I’ve found that I’ve fallen into a monthly budget, of sorts. And, looking back over the last three months I’ve come to the realization monthly budgeting sucks.
Wait, you’ve shifted to a monthly budget? But I thought…
No, I’m not intentionally keeping a monthly budget. Let me explain for those of you frequent this blog whilst also explaining to those who’ve landed here without reading through all my previous posts on the subject of budgeting.
I have a very strong view that weekly budgets more easily keep you on track with your finances.
If any of you have downloaded my budget spreadsheet or you’ve read any of my other budgeting posts you’ll probably know I keep a weekly budget. For those that don’t have my weekly budgeting spreadsheet, you can pick it up for free by clicking here.
Anyway, I said I’d fallen into a monthly budget and monthly budgeting sucks.
That’s confusing given that I keep a weekly budgeting spreadsheet to manage my finances.
If I’m keeping a weekly budget how is it possible for things to start going wrong?
Well, I appear to have inadvertently fallen into a monthly budget. Here’s how that’s happened:
You might recall that in October last year I landed a new job. If you didn’t read that post, actually there was two of them, then shame on you.
I’m just kidding, but the outcome of landing this new job, apart from a pay rise, was that this job pays me monthly.
My last job used to pay me fortnightly.
When I was paid fortnightly budgeting was a breeze.
I rarely ran out of money before my next pay day.
I operate on a zero sum budget. If you don’t know how a zero sum budget works go check out this post and come back.
Under my zero-sum budget, all my cash is pushed into savings or paying off debt. Each fortnight is designed to have every cent put to work on something. In my case, if it isn’t put to work on living expenses then I put it to work on debt. If you don’t have debt you should be putting your money to work on savings or investments.
But there are oftentimes where life has minor challenges. Perhaps a week where you needed to put an extra $10 of gas in the car because you ran an errand for a friend. Or there was an unexpected cost for a trip to the doctors and a need to pay for prescription medicine.
Yes, there would be the occasional fortnight when things got tight here and there. But as I got paid fortnightly I didn’t really need to wait long until I was next paid.
My bank balance was soon rehydrated and the wait of a few days was never painful.
That happened to me a lot. It probably happens to you too. These unexpected expenses come along and we absorb them onto credit cards. They compound and before we know it you’re facing a scary balance and a sickening interest charge every month.
Now, of course, I get paid monthly.
That monthly amount comes in and those little, unexpected expenses happen here and there. And because I see a balance they get absorbed without stopping and thinking. My mindset started to change with how my income came in.
Without realizing it, I had formed a monthly budgeting mentality.
I could see it in the figures. I could see it in those little spending patterns.
When I thought back to why I’d allowed myself to spend it was because I had a healthy balance in my account
Under a monthly budget waiting ten days until I next got paid has been agony.
In fact, there was one week I couldn’t cover my rent and I had to use my emergency fund.
Thank goodness for having an emergency fund! If you don’t have one, check out these posts. You need to save for one today. They are truly a lifeline:
- How to Save a $1,378 Emergency Fund and Have Fun Doing It!
- 12 Month Emergency Fund Challenge
- 3 Questions To Ask Before Using Your Emergency Fund
It is often these unexpected expenses that take us out of kilter on our budgets. My pain in experiencing a monthly budget made me painfully aware that it’s so much easier to hang on for a few days compared to weeks before money comes back into my account.
Am I really on a monthly budget?
Yes. I think so. If you download the budget template spreadsheet that I use you’ll see I break my budget spreadsheet into weekly columns.
I check in with my budget weekly. I break my expenses out weekly. I consider that I used to operate a fortnightly budget because I was paid fortnightly. I structured all my bills to coincide with when I get paid. This meant that I got my essential living expenses paid off as I got paid. Automatic payments were set up for payday for things like my electricity bill, insurance, debts etc.
Then, I started getting paid monthly. I didn’t alter my bill dates, but I found I started to structure my thinking around when I was paid. I fell into monthly budgeting without realizing it.
The big difference between a fortnightly and a monthly budget
The biggest difference for me in being paid monthly is that my company takes my salary and splits it evenly into twelve monthly payments.
I’ve been in jobs where they calculate the days you work and you’re paid at the end of the month accordingly. If that happened, perhaps things wouldn’t be so difficult. But I’m not convinced it would matter that much. At least twelve equal monthly payments provide predictability.
But it’s a double-edged sword.
The impact for me in my current case is that some months, January being a prime example, I have to survive for 5 weeks on the same amount as a 4 week month.
Additionally, I had set up fortnightly repayments on my utility bills, debts and insurance to coincide with my previous payment date.
Finally, it didn’t help that the 5 week month was also the month I allowed myself “a breather”.
My budget showed that I could afford to do this, but it probably wasn’t the wisest of decisions if I’m being brutal with myself. Gladly, I’m not.
You can see the conundrum thought, right? I have the same amount of pay to last me 5 weeks. You’re always likely to experience some slippage in your spending and it adds up. Sometimes in a big way.
Mine took me about $400 over budget and all of a sudden there was no money for rent.
That was when I realized there was a bigger problem that needed some scrutiny.
If you run a monthly budget you’re going to come across the same issue. There’s always going to be an inconsistent number of days each month. This is not going to help you. Consistency is key to getting a budget right, particularly if you struggle to keep within the boundaries of your budget by overspending.
It probably doesn’t seem like much. For those who cope just fine on a monthly budget, I pose to you that weekly or fortnightly budgeting will be easier.
Fortnightly budgeting will give you 26 equal periods of 14 days. Weekly budgeting naturally gives you 52 weeks. Whether you opt to follow a weekly budget or a fortnightly budget, each will give you the same number of days to last on.
This will make the division of your money in that time equal and consistent, which will help you drive good spending habits because you’ll arrive at intuitively knowing how much you have to spend each period.
The big upside for breaking it down into smaller period is that you have fewer days to wait if you overspend, which makes it easier to not dig yourself into a bigger hole.
Could you wait a full 24 hours of not spending anything before knowing you have funds back in your account again?
Imagine holding out for five days, or seven, or even ten days.
Much more painful, right?
So how did I fix my monthly budgeting conundrum?
I can’t change the fact that I’m paid monthly by my employer. But I can change when the bank account that I operate from gets paid!
So here’s what I did:
I started by setting up a separate savings account. I’m going to call this my wage account. It’s a savings account because I want to earn a better rate of interest than a normal cheque account. Also, I’m likely to have a surplus of funds in here over a period of time, which I’ll explain shortly.
When I got paid on the 16th of the month, I transferred all of the money to this savings account. I could have had it paid directly into the savings account, that would have been as simple as telling my employer I had a new bank account number. Either approach works.
The important factor for me is that this savings account was with another bank.
I did this for two reasons:
- I would not have a debit card for this account. This made it impossible to dip into these funds at the grocery store. If I wanted funds (and I would do my utmost to avoid touching this) I had to transfer between banks overnight. This distance, or delay, would force me into logical rather than emotional decision making.
- I could automate payments. I can’t set up scheduled transfers between internal bank accounts. But I can set up automatic fortnightly payments from one bank account to pay another account somewhere else. Much like paying a bill. I needed to be able to set and forget. It’s been a key strategy for me in paying off debt.
This second point enabled me to set up an automatic payment that would effectively simulate being paid fortnightly. I could set and forget!
Being able to set and forget has been a key factor in my ability to pay down debt fast. Being able to do it here was a winner for me.
Again, I could have just given my employer the other bank account number. I just did this to see if the process would work (and it does) before updating paperwork with my employer.
Divide and conquer
The next step was to figure out how much I was going to pay myself on a fortnightly amount.
Whatever your situation is in respect of your income the ultimate aim for you here is to have an achievable and consistent amount that you will pay yourself each fortnight.
For example, for me, I took my 12 monthly payment amounts, added them together and then divided by 26, since this is the number of fortnights in a year.
If you want to move from a monthly budget to a weekly budget then you’d take the sum of your twelve monthly payments and divide by 52.
Now, I had to factor in that there would be a discrepancy in when I got paid (monthly) and when I drew down from that pay (fortnightly). Timing was important. I needed to ensure that I always had funds in the wage account.
Because some months would have five weeks in a month if I didn’t time this right I could end up with not enough money in my wage account. I may have to wait a week until I was paid. It’s just simply a cash flow problem. I’ll demonstrate this in a moment with an example and some diagrams to help you.
I did two things to get around these. You will only need to do one. The second was a personal choice for me.
Set up a wage account spreadsheet
Firstly, I set up a really simple spreadsheet. It is super basic. I have a couple of rows in addition to a starting and ending balance. Here’s what it looks like:
The first row is money in. The second, money out.
My columns are weeks, just like my weekly budget spreadsheet. I’ve put some example figures in to demonstrate how this works for you. Assume I get paid $4,500 a month into my account after tax and other deductions. Let’s also say I get paid on the 16th of every month.
I simply add in my pay amount in the week that I expect to be paid by my employer in the “money in” row. I then add the weekly or fortnightly amount in the “money out” row. I copy these figures in throughout the year and I get a clear picture of whether I fall short in any given week.
If I half my monthly amount, wrongly assuming there were just 4 weeks in a month, you can see that everything goes swimmingly well, at first.
But then I hit August, and this happens:
You see what happens? There are five weeks between pay day in July and pay day in August.
If you look back to the first image there’s also five weeks between pay day in April and payday in May. But the difference is that I timed my initial payments right in this case.
Now, in my situation, I did fall short early on. It was a timing thing, as I’ve mentioned. I got around this by starting this process a week later.
This is why timing was important to me.
Now dividing my monthly payments into fortnightly amounts still isn’t going to solve the problem. Here’s what that would look like as a calculation:
$4,500 x 12 / 26 = $2,076.92
That’s still going to pose a cash flow problem both in August and again in September!
So I did something to appease my cash flow situation. This is the second thing I referred to earlier.
This is the second thing I referred to earlier.
Since I got a new job 6 months ago I’ve been paid more. I haven’t really noticed it as much since I’ve been getting paid monthly, but it’s there. I could see the improvement when I divided my monthly amounts into fortnightly payments using the calculation above.
I gave it some thought and realized that I coped on my previous payments before the pay rise. So, I’ve opted to pay myself the same amount that I used to get paid. This is forcing me into living well within my means.
Take our example scenario, do you see what happens when I change the amount from $2,076.92 to just $1800 a fortnight?
Things fall into place. I become cash flow positive.
And that makes all the things happy!
Each month I now have a surplus in my wage account which helps the cash flow to ensure I can always pay myself fortnightly.
And there’s a bonus, which I’m experiencing also.
By December I’ll have enough of a surplus to take a breather at Xmas and pay off a lump sum of debt if I still have it by then.
Get yourself off a monthly budget
So this provides you with an efficient way to get yourself off a monthly budget and into weekly budgeting. Weekly budgets are easier to keep. You check in on them more regularly which keeps you accountable to yourself on a weekly basis. If you veer off track you will realize faster and can pull yourself back in line more easily.
The above should help you figure that out and provides you with an efficient, systematic method for managing payments to yourself if you get paid monthly. Doing this will give you regular and predictable amounts.
The upside is if you overspend in any given week you’re only likely to have a day or two to wait until your account is rehydrated with more funds. Try it and let me know what you think.
And before you go, let me know if you’d like me to include the adjustment spreadsheet in with my free weekly budget spreadsheet. If you’re keen, sign up to my mailing list and I’ll work on including it.