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When you hear someone say that they live “from paycheck to paycheck,” it usually sounds as if they’re not budgeting responsibly. Most financial advisors suggest having a cushion of money set aside so if that paycheck happened to disappear one day, you would still be able to put food on your table. However, if you handle your money with a rigorous system of buckets or envelopes, living paycheck to paycheck is a responsible approach to money management.
The idea behind the envelope system is that as soon as you receive your paycheck, you decide what you’ll do with the money. You might set aside a certain amount for a savings cushion so it grows fatter every month. Then you decide how much will go to the month’s groceries, movies, new clothes and so on. You also set aside all the money you’ll need for paying bills, and you put some money toward a large future purchase. Your vacation fund and investment account grow at predictable rates with this system, while you avoid overspending on impulse purchases. When you reach the bottom of the entertainment bucket for the month, you postpone your plan to see the newest movie until your next paycheck arrives.
Words like “buckets” and “envelopes” came into being when cash was the easiest way to handle spending. However, using cash isn’t practical for paying bills anymore, and for daily expenses, it can be easy to lose track of which envelope that $20 bill came out of. Instead, personal finance sites like Personal Capital keep track of your spending categories electronically.
The benefit to immediately dividing each paycheck into spending categories is that it keeps you on your toes regarding how much money goes to each type of expense. While it’s easy to hand over a few bucks each morning for a latte and croissant, you won’t feel as happy about designating $100 at the beginning of the month for a daily indulgence.
A good personal finance app gives you all the tools you need to make living paycheck to paycheck become your key to managing money wisely for a solid future.