mypfblog – Documenting my journey from debt to financial freedom.

My employer recently changed their payroll schedule from bi-weekly (every other week) to semi-monthly (twice a month). For budgeting reasons, I am very happy with this change, since I have found semi-monthly to be the best payroll schedule to combine with a monthly budget.

When I worked as a contract software developer several years ago, I was paid weekly. This had some definite advantages such as never having to go more than a few days before another payday. However, I also spent a lot more money and could not properly manage my finances because the desire to “reward myself” with a treat or a night out on payday meant I was doing those things far too often. In the end, it was pretty challenging to coordinate a monthly budget plan with weekly pay periods.

Recently, I was paid bi-weekly, which was a little bit easier because there were not as many pay periods to account for in the budget. The problem with bi-weekly for the way we budget is that the paydays constantly shift around since a payday may be on the 15th one month, the 14th another month, the 12th another month, and so on. Additionally, your annual salary is broken up into 26 paydays. This means that for ten months of the year, you make less money than the other two. Often when those “bonus months” happen, the third paycheck is treated just that way, as a bonus that gets spent on things outside the budget. In order to avoid being tempted in that way, we have found that the best pay cycle that works for us is semi-monthly.

With semi-monthly, we get paid the same amount every month: 1/12 of our annual salary. We also get consistent paydays. I have usually been paid on the 15th and last day of the month at jobs which use a semi-monthly cycle. However, I have also seen the 1st and 15th and even 7th and 21st. The great part about semi-monthly is you take home more money per paycheck than bi-weekly (over 8% more in fact) and it is reliably consistent in timing. Since more or less all of our bills are monthly and due around the same day of the month, month after month, having a paycheck that mirrors this helps budgeting tremendously.

For example, in our monthly budget I was previously unable to make all of our major monthly bill payments as well as take out our monthly cash for our envelopes (Groceries, dates, clothes, etc.) I would have to wait until halfway through the month to pay something. With the semi-monthly change, my take-home pay is higher now and we can both take out the cash we need and pay all the major bills on the first paycheck of the month. This leaves the second paycheck for things like debt snowball payments.

I know most people have no control over when they get paid, but if you work at a small company, your management may be open to the idea of switching to semi-monthly pay periods. It’s great for budgeting and it puts more money in your pocket on a more consistent basis in line with your expenses.

This is my first attempt at posting our monthly budget. Each month our family sets up the budget in an Excel file and that guides our expenses for the month. We do not make any purchases that do not come from expense categories in the budget.

After doing this for a couple of years, we have gotten to the point where this part of our personal finances is largely on auto-pilot. We do adjust the budget, but many months, there are no changes and we just copy the budget from the baseline column I set up for that purpose.

It is definitely recommended for people just starting out with budgeting to have real family budget meetings every month. If you get to the point where you’re used to the budget and your finances are on auto-pilot, that’s great, but don’t try and rush it.

A few discussion points about our budget here since this is the first time:

• We wanted a file that let us fill out our budget categories the way we wanted to and showed that we were staying within a zero-based budget. Our Excel file automatically tallies up the income and different expense categories and shows a zero sum if we’re doing it correctly.
• As I mentioned earlier, our budget includes a baseline column which is basically a budget for a typical month. Each month, we start out by copying the baseline budget into the month column, and making whatever adjustments we need to make for the month. After doing this for a few years and squeezing a lot of blood out of the turnip so to speak, few or no adjustments are required.
• We include many lines for paychecks, which is a legacy format from when we were DINKS (Dual Income No Kids) and had four or more paychecks in a given month, not to mention rental property income.
• There is an income category for “Found/Carryover”. We realized that the easiest way to keep the budget from getting all screwy with things like store returns, refund checks, or literally found money, was to treat it like an additional paycheck and deposit it on the first of the month, the following month and enter it in the budget as a paycheck.
• Our emergency fund is fully funded at our current level (6 months of expenses), so that is why that category has $0 allocated to it.
• We separate out cash envelopes (literally envelopes we carry cash around in that we get from the ATM once a month) and checking envelopes (virtual accounts we keep in Quicken, but use in the exact same way we would use a cash envelope, except that there is no cash.  The current breakdown works the best for us.  Some people use a lot more cash envelopes, and some use none.
• At the bottom of our budget, I added a little monthly bill checklist which each time I make a payment to one of our monthly bills, I put a little x in the box, so I know where I stand for the month.
• The debt snowball envelope is a virtual account we use for our Dave Ramsey Debt Snowball debt elimination method. Essentially, it’s all the money we have in the budget that is not budgeted to another expense, and is used to pay down the principal on our existing debt. Since we only have one debt left (the land mortgage) this is the extra amount we are applying to that debt for the month.
• For the month of January (and most months, since they all have a fairly similar budget) we have $7177.03 in income, $4007.91 in monthly expenses, with a debt snowball of $3169.12, meaning we are living on 55.84% of our income for the month and applying the rest to our debt.