The Importance of a Buffer in a Bi-Weekly Pay World
I started using YNAB mid-January. I back-budgeted the month of January so I had a clean start with the new year. I based my monthly budget on 1/12 of my annual take-home pay, which seemed to be logical at the time -- I am a salaried employee with no side-hustle, so this is very constant (as long as my employer continues to find me valuable). I came into January with a few hundred dollars in my checking account that went into TBB and some savings money that immediately was budgeted to savings. Given that January was a 3-paycheck month for me, I was able to start off with a buffer of 1 paycheck, plus the few hundred dollars I started with. Yay! I have a buffer! Granted not a full month, and realistically the money was received only 1 day before February, but still, it was January money and I was feeling pretty good about that. Now that my February is fully funded as of this past Friday's pay, I noticed that the amount I will be carrying forward to March (a small amount from this past pay and my next paycheck) is less than I carried forward from Jan. to Feb. And thus is the curse of the bi-weekly pay cycle... and the realization of just how important that buffer is.
Let's say I take home $1500 every 2 weeks (not my actual pay, just numbers that figure easy). Given I'm paid 26 times in a year, that works out to $39,000 annual take home, which breaks down to $3250/month. So this is my budget base. However, in all but 2 months of the year, I am actually only receiving 2 pays, for a total of $3000, leaving a shortfall of $250 per month from what I budgeted. Looking ahead, my next 3-paycheck month is July. So in the 5 months that I will have only 2 paychecks (Feb - Jun), I will watch my buffer decrease by $250/month, for a total of $1250, which will eat up almost my entire buffer (not accounting for buffer-beef-up along the way). While it will be disappointing to watch my buffer slowly dwindle each month, it certainly makes me grateful I was able to start with that 1/2 month buffer in the first place... and makes me all the more determined to build it up as quickly as possible!
Given that the money I am putting into savings type categories each month is greater than the $250 shortfall, I am not fearful of running my checking account low, but I do not like the perception that I am going backward each month as I watch my buffer get smaller. I am actually toying with the idea of reducing my monthly budget base to be the total of 2 pays (so 1/13 of my annual take-home, rather than 1/12) and then the 2 extra checks (Jul and Dec) would just go to get the buffer fully funded and the rest into savings.
However, that presents its own challenge. As it is now, I will eagerly await the extra paychecks in Jul and Dec to get myself back on track, if only for a month before the cycle begins again. But, if I were to base my budget on only the 2 pays I am actually receiving each month, those 2 extras checks would seem like just that -- extra. While the plan would be to use them to beef up the buffer and savings, it might be too easy to dip into that money, reasoning that my budget is doing fine without it.
Thoughts? If you receive bi-weekly pay, how do you reconcile the difference between budgeting your month based on 1/12 of your annual take-home pay, but only receiving 1/13 of it in most months? Or am I just overthinking this (that would be entirely possible)?
Can you just budget for the month ahead?
i.e. 3 pays in Jan means you start with February fully funded, and some activities in March already funded.
At the end of Feb, you'll fully fund March, and part fund April (but less of April than you funded March).
This continues until you hit June and don't have any extra reserve left to part-fund July. BUT in July you get 3 pay checks, so you'll be able to fully fund August and part of September, and restart the forward budgeting.
There are two useful things to work toward:
1. Budget in month-sized chunks equal to 2 paychecks (2/26 or 1/13 of annual). Things are more clear when you can budget all categories at once on a calendar basis. This means each month will be funded by money received in the previous month.
2. Budget a 1/12 annual sized chunk each month. When you get the occasional third check, stash 5/6 of it in a holding category and release 1/6 of the original amount back to the budget in subsequent months. (2/26 + (1/26) / 6 = 1/12) This normalizes your budget so you don't have to mix it up 4x each year. A consistent budget is easier and less prone to error.
I suggest to do #1 first because living on last months income gives you more options and greater simplification.
I budget based on 2 pay periods a month, and then put those 2 extra paychecks into various categories when they come. I find this much easier to mentally track than having the floating numbers, even though I know technically it doesn't matter.
If you're invested :) in budgeting and YNAB, it won't be a problem adding that money to the categories and avoiding spending it because you'll already know what your priorities are and why you want to save the money. Remember that this isn't about saving money just to save it -- it's about saving money for the purpose you choose, based on priorities. I'd start by filling out your buffer, and then think about bigger items that take longer to save for like home repairs, new car, etc. I also have seasonal things like soccer tickets, gardening, tax prep, etc. that I know roughly what I spend each year, and so just fill those categories at once, rather than budgeting monthly.
I used to base my budget on 1/12 of my prior year's net income, prior to finding YNAB, and could never figure out why I was almost always over-budget. It took me about 3 months of using YNAB before I realized it was because of the weird pay cycle. So now I'm doing what mr_pibb is doing - basing each month's budget as if I only receive two paychecks. Money is like.this.tight but at least I'm spending within my means now.
This year, when one of those magical 3-paychecks months arrive (for me that will be May & October), those dollars will get jobs based on need/priorities at that time.
I'm still only about 2-weeks buffered at this point and working towards a full month. So if that will help me get to full month, great. Otherwise, I'll assign them jobs and still fund my categories with money I have, not money I expect(ed).
Slow, but steady progress!
I also get paid every other Friday. It never occurred to me to set my monthly income at 1/12 of my yearly income because that's not how I receive it. YNAB says only budget what you currently have. What I have is what my actual paycheck is, not what my yearly salary divided by 12 is. It's always such a pleasant surprise in those rare months when I get 3 paychecks. I honestly think this is a much easier way to budget than the way you're doing it :-)
I'll give a different perspective. I'm not just starting with YNAB and I have way more savings than a simple buffer. My husband and I are also paid every 2 weeks. On different days of the week so more often than not, we receive our extra check in a different month. For example, for me this year I think it's May for both then September for me and October for my husband.
I've tried to budget both ways:
- only based on 2 checks and extra checks in savings categories
- 1/12th of the income by putting aside the equivalent of 1 month income at the start of the year and adding 1/12th of that each month
The verdict is budgeting 1/12th of our yearly income gives us more clarity on our budget. When putting the extra checks in savings categories, it gave me the feeling we didn't earn enough to fill our goals. I would have to do more maths, and it gives the feeling the reports and the budget don't give the same story. And less important: it makes the goals useless for your savings categories. This is easily dealt with by putting the amount you want to add to each saving category in the name, keeping in mind it's only for when we receive an extra check. But receive the extra on different months makes this harder to accomplish.
In short, I found this method was more work for us to understand where we stand financially. It also kind of depress me as I would always feel we didn't have enough to fund our goals and only money for the everyday stuff. We have some very expensive goals and it was hard for me to know when we would have enough saved for those without some extra work and a calendar to know when the 3rd checks would come. In fairness, depending on your mindset, it might work in making you feel money is tight and getting you to save. Also, if you don't have the money to front-load the category or have to wait for your first 3 checks month, it works.
The verdict is budgeting 1/12th of our yearly income gives us more clarity on our budget
I second the clarity aspect of being consistent. Having a second "set" of categories for the "windfall" or anticipating a "plus-up" in some categories (but not others) is way more work than I want to do.
OP, I touched on this above, but to elaborate: the usual way to do this is to split your "extra" check over 6 month's worth of budgeting. Since you don't want money hanging out in TBB long-term, you can temporarily defer that unused portion in a category. Each month move 1/6 of the original paycheck amount back to TBB to combine with your normal 2 checks. Your monthly budget entries (excluding the deferred income category) then targets 2.1667 x a paycheck amount from then on.
(Just to verify: 12 months x 2.1667 checks per month = 26 checks. Job done.)
The cool part is that your somewhat variable income no longer has a significant impact on your budgeting process. Less work and less chance of making a mistake.
(The above assumes your next 3-check month is in 6 months. Occasionally it will be 5 months, so adjust accordingly.)
We just budget bi-weekly based on our pay days. We have a lot of things that we pay for on a bi-weekly basis (like our car payment, groceries, coins for laundry, gas), so it is just easier for us this way. For any monthly payments, if it is big, like rent, I just fund half of it when we get each pay check. and for months that we get an extra one, this doesn't affect our bi-weekly budgeting, and if we have some extra we use it to fund some goals or pay off some debts. I find that if I try to get to calculated about things, then it gets frustrating when things don't go according to plan.