How to Budget After Years of Living Paycheck to Paycheck

So, you got that promotion or fancy new job. It feels like a relief after years of barely scraping by.

Time to buy a car and take a big vacation, right?

That’s probably not the best decision, said Alicia Jegede, a certified public accountant and financial planner. But it’s something she sees quite a bit.

“Some people get a new job, and all of a sudden they change their whole life and get overwhelmed,” she said. “Lifestyle changes should happen gradually.”

An increase in income can be exciting, especially when you’re used to having lived paycheck to paycheck.

By one report, 80 percent of Americans are currently struggling to make ends meet. When you’re living that way, every cent goes to your expenses.

So how do you figure out what to do with your money when you suddenly have expendable income?

Nix the debt

For starters, focus on any debt you have. It may not be fun, but it’s smart.

Illustration of couple organizing their budget on a smartphone. Paycheck to Paycheck pbs rewireCredit: Adobe
Luckily, you don’t have to use a pen and paper anymore. Budgeting apps on your smartphone do much of the heavy lifting for you.

“Student loans are usually a lower priority than consumer debt because it’s a lower interest rate,” financial planner Sarah Behr said.

Your credit card bill is consumer debt. If you’ve been making those minimum payments each month, think about doubling your contribution or paying it off completely.

The sooner, the better. That’s because the longer you keep a high-interest loan, the more money you’re spending. Consumer debt is also more damaging to your credit score if you don’t pay it, Behr said.

[Read Next: Lessons From the Debt-Free Community on Financial Freedom]

You don’t have to be as urgent about paying off your student loans.

“If they’re within a 3 to 6 percent interest rate, it’s kind of like a mortgage, it’s considered healthy debt,” Behr said.

If you don’t have other debt, paying off a student loan or two might be something to consider. That would allow you to free up a chunk of money each month for other things.

Start saving

Jegede tells her clients to put aside at least 10 percent of their income to save for retirement.

If that amount isn’t doable right away, that’s OK. The key is to first start a retirement savings account— like a 401K — if you don’t have one already.

There are a bunch of different kinds of retirement plans to consider, depending on how much you make and what line of work you’re in.

These accounts often take money directly out of your paycheck and grow over time. Many employers will match your contribution up to a certain amount.

That’s especially important for the younger side of the population, since the U.S. Social Security system is expected to run out of money by 2034.

It’s also a good idea to have an emergency fund saved up. About 23 percent of Americans have no emergency savings at all, and in 2017, 44 percent of people said they wouldn’t be able to cover an unexpected $400 expense.

Jegede recommends having at least six months worth of expenses saved up in case of emergency, but you don’t have to get to that point right away. You can start now and gradually build up over a year or two.

Don’t ditch the roommates

Once you’ve focused on your debt and your savings, you can think about how you want to use any money left over.

For some, actually allocating money to savings for the first time means they don’t have as much extra money to spend on their lifestyle as they thought. That’s OK, Behr said.

Even if you do, you don’t have to spend it all or change your lifestyle if you’re happy with the way it is.

“Living below your means is the best practice and the best discipline,” she said.

A raise doesn’t mean you have to ditch the roommates or move into a nicer apartment if you don’t want to.

“If you live with roommates and you’re happy, no need to move out on your own,” Behr said. “There might be a day when you want to live on your own, and that’s going to cost more money.”

For example, if you don’t have children or own a house, but are thinking about it someday, those are decisions that will make living more expensive. Saving money now will make affording those goals possible.

That doesn’t mean you can’t make spontaneous decisions with your money every once in a while. Everyone does that.

It’s being thoughtful most of the time that matters.

“Establishing priorities is important,” Behr said. “Because then you don’t end up squandering all the money you have without any real thought behind it.”

Maybe you love going out for dinner, so you want to spend your money on that. Or, you love going to concerts. Or, taking a cycling class every Sunday morning makes your week.

Keeping in mind what’s important to you — and what isn’t — can help keep you from overspending.

Keep track

Make guidelines all you want, but the only way to know you’re on budget is to actually keep track of your spending.

Luckily, you don’t have to use a pen and paper anymore. Budgeting apps on your smartphone do much of the heavy lifting for you.

For instance, there’s Mint, a free budgeting website and app from the same company that makes Turbo Tax, Quickbooks and Payroll.

“I like Mint because you can be connected to all your bank accounts,” Jegede said. “It pulls all your information in without you having to do much.”

Another popular option is You Need A Budget, which is a bit more extensive and offers online classes, but does have a monthly fee.

The key is to be realistic about the limits you set in each category — for instance, don’t set a $20/month food budget when you know you typically spend $200.

You don’t have to be rigid with your budget, either, if you know you have some wiggle room. Don’t punish yourself for going a few dollars over in one category.

You’ll naturally spend more some months and less other months. Being aware does go a long way.

If budgeting apps seem like too much of a chore, Behr recommends doing a quarterly review of your expenses instead.

That way you’re not always thinking about it and getting anxious, but it’s still on your radar.

Jegede said many of her clients feel anxious about money and creating a budget. Her goal is to get them to a place where they feel confident about it.

But often, the hardest thing to do is get started. That’s also the most important. Don’t put it off.

“You just have to get into the weeds and figure out what needs to be done,” she said.

Gretchen Brown

Gretchen has reported on the criminal justice system in rural Minnesota and covered everything from politics to millennial truck drivers for Wisconsin Public Radio. She is passionate about public media as a public service. She’s also into music and really good coffee. Follow her on Twitter @gretch_brown.