How to Create a Budget When You're Living Paycheck to Paycheck

Servicemember stressed about finances.

Did you know that one-third of American households are living paycheck to paycheck? It's a sobering statistic, especially when you consider most of these families are considered middle class.

For these average Americans, the American Dream should be well within their reach. We assume the middle class finds it easy to use their income to cover all their expenses and then some. So why are 33% of people are finding themselves scraping the bottom of the checking accounts in the days before their next paycheck comes through?

The problem may lie with a low level of financial literacy in America. Being financially literate means you have an understanding of how money works in the real world and how to practice good money management to maintain financial security and stability. With so many people living paycheck to paycheck, it's clear that our money management skills could use some improvement.

If your family is living paycheck to paycheck, one of the best things you can do for your finances is to create a budget. Most people aren't thrilled when they hear the word "budget" (only about 40% of American adults are even bothering keeping a budget), but knowing where your money is going is crucial when you continuously find there's nothing left at the end of each pay period.

You need to be aware of the bills, irregular expenses that pop up every few months, and how much you really have to spend toward things like groceries and gas.

Here's how to effectively create a budget while living paycheck to paycheck.

Begin by Tracking Your Spending

It all starts with knowing where your money is going, down to the last cent. You can't afford to lack this knowledge when you're living paycheck to paycheck. It's invaluable, and it will open your eyes as to where you're putting your money every month. You may be surprised at the results.

You might want to track your spending for a few weeks, or even a whole month, to get an idea of the entire picture. If you pay with cash, you can use a note app on your phone, or get a daily planner. Use whatever tools make sense and work for you, as long as they provide an easy way to keep track of transactions.

Alternatively, you can use an online service like to help you track your spending. You can link your credit card and bank accounts up with and set a budget with it, too. You could also use an old-fashioned Excel spreadsheet. Again, do what works best for you.

They key is to prevent anything slipping through the cracks.

Compile a List of Expenses

To start your budget, you will want to compile a list of current expenses so you know how much money you'll be spending in a given month. Yes, some things may change from month to month. To deal with this, break your expenses down into fixed costs – like your mortgage or rent, car payment – and flexible or variable costs, like groceries, gas, and utility bills.

Budgeting will also help you prepare in situations where you have to deal with some highly irregular expenses. Events such as birthdays, holidays, and car maintenance tend to sneak up on people. If you do your best to include these in your budget where you know they might pop up twice or three times per year, you will know ahead of time to move money around for them.

You can make a budget for every month of the year to deal with events like Christmas or a school holiday. Or, you can maintain the same budget across the board and break down big, infrequent or yearly expenses into something that works out to be just $10 or $20 per month. The latter option might be better for those struggling to make ends meet as it is. It allows you to take a big cost and break it down into smaller, more manageable pieces.

Do the Math

This might be an unpleasant part of budgeting, but it is a necessary one. Fill in what you would ideally like to spend on your variable expenses, and add up all of your expenses. Then, calculate how much income you bring in every month.

This is easier to calculate if you're salaried, but if you're not, you can go through your paystubs to get a better idea of what your average income looks like.

After you have your amount, subtract your total expenses from your income. Do you have anything left?

Analyze Your Actual Spending

If you don't, it's time to face the music. Be honest with yourself and your numbers, and accept it might be time to tweak your budget.

Are you going out for dinner and movie once or twice per week? Do you have cable, or an expensive cell phone bill? Are you paying for a $100 per month gym membership but struggling to come up with money for the electric bill?

Work to lower your expenses so that you do have something left over at the end of the month. If your goal is to try and save whatever you can, you should be doing everything in your power to spend only on what is necessary.

If you do have an amount left over after you've looked at the total cost of your expenses versus the income you're actually bringing in, that's great – but your work isn't done yet.

Factor in your actual spending after tracking it for a month or two. Use the information you gathered via your spreadsheets, a budgeting tool like Mint, or other app of your choice. Add what you actually spend for the month up, and ask yourself that all important question once again: do you still have money left at the end of the month?

If you don't, it's time to take a closer look at your finances.

Plug any leaks that you find. Have you developed a habit of going out for lunch at work? Are you throwing out groceries at the end of the week because they went bad? Are you being wasteful with electric?

It might turn out that you can prevent yourself from living paycheck to paycheck with a few simple fixes and small changes of habit.

Look for ways to increase income

It can be really hard to make more money, but there are ways to do it if you have a little extra time in your week, and this can help you be successful with your budget. One of the main ways is to look online or look in your local community for well-paying freelance or hourly jobs.

For example, a student, local business, or neighbor may need help with writing essays, learning to play an instrument, building a website, etc. If you have a hobby or a talent, you might be able to get paid for teaching someone or creating a product for them.  

Use Your Budget as a Tool

You budget is a tool to help keep you accountable, so make use of it. When you have a clear guideline to follow every month, making decisions on where to spend becomes easier.

Your budget will tell you how much you have left to spend on your variable expenses. If you go over on one category, figure out what went wrong, and correct it for the next month.

Be sure to practice mindful spending. This means eliminating impulse buys and ensuring that what you're spending your money on is actually aligned with your values. If you want to do more with your finances and stop living paycheck to paycheck, you must prioritize your spending and understand what is truly important to you (here's a hint for success: it shouldn't be material goods!).

While it's important to be disciplined where spending is concerned, you have to be realistic with your budget. If you try and cut your grocery spending by too much, you might find yourself missing the target and becoming disappointed.

Your budget is going to need tweaks here and there; try and work with it, not against it. No one gets budgeting right on their first try. Hopefully, by tracking your expenses and working to reduce them, you can start saving part of your paycheck instead of spending it.

Kali Hawlk is a personal finance writer for ReadyforZero, a website for getting out of debt. She enjoys discussing topics like student loans, budgeting, and paying off debt from the perspective of a millennial.  

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