Pay Period Budgeting with Multiple Income StreamsMar 16, 2023
Oftentimes when I talk about budgeting by pay period, people count themselves out simply because their household has more than one income stream. I'm here to tell you that it's even more important to map your finances out by pay period when you have multiple income streams, and here's why.
Solving Your Cash Flow Puzzle
Multiple income streams means that your cash flow is all over the place during the month. Not only is it not all coming at once at the beginning of the month, but sometimes they're coming close together. Sometimes they're coming far apart. Different pay schedules have different frequencies, and when we have more than one pay schedule operating in one bank account at the same time, this can feel like a puzzle that's too difficult to solve. A pay period budget will solve this puzzle for you.
Your cash is flowing in and out of your bank account all over the place, and you might be so frustrated thinking this should be something I can figure out, but I just can't seem to nail down these numbers. When we build our budget by pay period, we establish a calendar for our money. We identify when the money's gonna come in and what we need to do with it before we get paid again. So here's how I build budgets by pay period when the household has more than one income stream.
It doesn't matter if it's one adult with a full-time income and a part-time income, or it's two adults working full-time, or it's two adults. One full-time and one part-time. The system works the same way. What I do is establish the primary income in this household, and this doesn't mean it's necessarily by amount, it's just the one that is the most ideal for us to budget by pay period.
So when I'm looking in a household's budget for their primary income, I'm looking at three things. How much are they paid per paycheck? What's the schedule or frequency? We've talked in the previous mini episode about the four different schedules and how variable or secure is that income. So if there's an income that's rather large, but it's highly variable, I might not jump to considering that as the primary income.
So, let me give an example. Let's say a household has one person working full-time, paid $3,000 a month, and they're paid once a month on the 10th of the month. $3,000 once a month on the 10th of the month, and the other adult is paid every other Friday, and they're paid $1,400 every other Friday. These income amounts are basically the same, $1400 every other Friday or $3000 once a month.
But a once a month income is hard to budget for because we have to stick to a certain amount of money for 30 days, which is a long time. And if we were to budget this household by once a month, we would assume that we get both of those incomes at the same time. But really the person who's paid biweekly is gonna have paychecks spread all throughout the month.
So what I would choose as this household's primary income would be the every other Friday income, I would set up the pay periods according to every other Friday in my budget template, we write the dates of these pay periods across the top of the budget, not just the day of the payday, but the full range of the first day of the payday to the day before we get paid again.
Once we establish this biweekly income at the top of the budget, we would then look to these dates and find the pay periods where the 10th of the month falls. That's where we will include this once a month paycheck. What we've now established for this household is a budget built by every other Friday, so we know every time a new pay period starts, we're working with a new set of money and we have a plan for exactly what we're going to do with that money until we get paid again. Two Fridays from now, we've also identified where that 10th of the month paycheck will fall so that we can make a plan for using it when we receive it, not just a general monthly budget.
How to Identify Your Household's Primary Income
Now, here's something important for you to hear. There is not a right or wrong answer to identifying your household's primary income. It's about finding the schedule that works best for you that follows the schedule you would like to budget by.
Let me give a pretty common example that I see in custom budgets. Often one person is paid weekly and one person is paid biweekly in this example, unless one of the incomes is massively larger than the other one, like three to four times what the other one is, it doesn't really matter which one we choose. I know some people look at this schedule one weekly and one biweekly, and they prefer to budget by week. So they make one column for each week. They take that weekly paycheck and they know that if, for example, if they're paid every Thursday, their budget is gonna run from Thursday to Wednesday, and then when they get paid that weekly check, the next Thursday, they'll move to the next pay period.
However, I also know some people look at this scenario with one weekly income and one biweekly income and choose to budget biweekly so they will receive two weekly paychecks inside of the biweekly schedule. It's not about a right or wrong, it's about which one feels and works best for you. Some people will find it ideal to work on the weekly schedule because it's small amounts of time and every other week they receive a biweekly paycheck. So they like the weekly schedule because they're following the most frequent pay. However, some people don't like how quickly a weekly pay period comes and goes and feel like they're constantly restarting. So they prefer to operate on this biweekly schedule knowing that they'll receive two weekly paychecks during the biweekly schedule.
So what I want you to do when you are looking at your household and seeing multiple streams of income is I want you to just take a post-it note or a piece of paper or open a blank document on your computer and write down how much the check is, what's the schedule, and how variable is that income. Then come up with two different scenarios that might possibly work for you and write them out.
Sometimes identifying your primary income is going to be very easy. You might have two streams of income. One of them is your full-time job and one of them is your part-time job. We're gonna budget by the full-time job because we want to start each pay period with as much money as possible.
So if your full-time job pays you $2,000 on the 15th and the 30th of the month, and your part-time job pays you 200, On the 10th of the month, we're not going to budget by this part-time income. We're going to budget according to the full-time income. And once we've set up the dates and the schedule of the full-time income, we will fill in the part-time income, whichever pay periods, it falls.
But for some of you, this will be a little more challenging if you have multiple streams of income that feel pretty equivalent, whether it's because of the size or because of the schedule, you may wanna set up two frameworks for a budget.
You don't need to fill the entire budget in to see how this will operate. You could set up just the dates and the paychecks according to one income schedule, and then set up the exact same thing on the other income schedule and just look at how that feels. Does it feel better to have a really frequent schedule or a less frequent schedule?
If you read my previous post on the pros & cons of the 4 different pay schedules, you'll know that if someone is paid semi-monthly, they are paid two times a month no matter what, and the dates of that paycheck are always the same inside the month. But someone who's paid bi-weekly has sometimes two paychecks in a month and sometimes three, and also has different dates of their, so sometimes they're paid the third and the 17th.
Sometimes they're paid the 1st and the 14th. Sometimes they're paid the seventh and the 21st. These dates rotate. So as you set up these example budgets to look at what feels best for you, think about the pay schedules your household receives, and which feels more ideal for you.
You are not locked into whatever you set up the budget. Even after you look at these two and you decide, I'm gonna follow the biweekly schedule, if you build a budget biweekly and you use it for a couple pay periods and think the timing of this just isn't working out, something about this feels off, my cash flow is not matching what my bank account or my budget is showing. I'm gonna try a different pay schedule. Feel free to find what works best for you because ultimately that is the goal. A budget that feels natural to what your cash flow is and helps you stick to your plan and follow through is the budget that works for you.
When Your Pay Schedules Don't Match
One of the main scenarios I see in a custom budget that really demonstrates why it's even more important to budget by pay period when you have multiple income streams is when you have schedules that don't match. So, for example, a weekly schedule and a biweekly schedule, they match in terms of their frequency.
All throughout your year, you will always receive two weekly checks inside of a biweekly check. But if we. One income that follows a day of the week, like weekly or biweekly, and one income that follows a date of the month, like monthly or semi-monthly. These schedules don't always line up. They don't always mesh in the exact same way.
If one of your incomes is paid twice a month, like the first and the 15th, and the other income is paid biweekly like every other Thursday, most of the time inside one pay period, you're going to receive one biweekly paycheck and one semi-monthly paycheck. However, the biweekly income is paid 26 times per year, and the semi-monthly income is paid 24 times per year.
So two times during the year, you're going to have an entire biweekly pay period that does not include. A semi-monthly paycheck because there are two extra pay periods compared to the semi-monthly income. When we budget by pay period and set these dates up like a calendar inside of our budget, we see when this is going to happen long in advance.
So we have a fair warning for when these numbers are going to look different for when we're gonna have a pay period that's biweekly, that does not include one of our semi monthly paychecks. When we can identify these things far in advance, they're not a problem. We make a plan. We set up our budget to use the money that's available to us during the dates we've set up. So instead of getting to that pay period that doesn't include a semi-monthly check and suddenly realizing what's happening and that we assumed we would get one when we actually don't. We have built our plan around these dates and we've incorporated the schedule into our budget so that something that is known to us in advance doesn't have to feel like an emergency.
Making Multiple Income Streams Work For You
So if you have been resisting the idea of a budget by pay period, simply because your household has more than one income stream on different schedules, I really encourage you to at least try setting up the dates and setting up the paychecks and look at how this might feel in following your cash flow accurately and building a budget that matches your real life.
If you're intrigued by this idea of a pay period budget and curious where to start, you can go to debtfreemom.co/store to download a free basic pay period budget template and just start plugging in your dates and your paychecks and play around with a schedule that would work best for you.