Dec 12, 2008

Managing cash flow when you're not living paycheck to paycheck

Two of my favorite personal finance bloggers recently discussed breaking the cycle of living paycheck to paycheck. Paid Twice revealed her 2009 goal of working one paycheck ahead - this seems to mean having enough in savings to cover expenses for the next two weeks without needing the next paycheck to do so. NCN at No Credit Needed explained how he became debt free and "escaped" the paycheck to paycheck cycle.

These articles got me thinking about how best to manage cash flow when you're not living paycheck to paycheck, because it's not something I've ever really thought of before. We built up a nice emergency fund early in our marriage, so we haven't lived "paycheck to paycheck" - meaning we need the next paycheck to pay our bills - in a long time.

But I manage my money as if I do need the next check. By that, I mean that our paychecks are deposited and distributions are made from there to the savings, emergency fund and infrequent bills accounts. Under this system, bills are paid with the money that was direct deposited by our employers. In fact, I'll hold off on paying certain bills each cycle until after payday because I don't want to transfer money out of savings.

Now I am wondering if it would be best to have our paychecks deposited right into our savings account. Then at some point each month, I would transfer the money needed to pay the bills into our checking account - without regard to our paychecks. For us, that would truly be breaking the paycheck to paycheck cycle.

I'm trying to work out what kind of impact this would have on our overall finances and money management, but I am leaning toward doing this. I think it could work out quite nicely for us. And give us a whole new mentality on how we manage our money.

What do you do? (Or would you do?)


Camille said...

We are still in the process of setting up savings/emergency funds but if we had it set up already, I think I would try having the paychecks deposited in savings as you suggested, making one transfer a month in the amount of what we needed for our budget. There really isn't much difference between that and just paying the bills from the paychecks, except a mental switch from living on the paycheck to simply being self-sufficient.

Hopefully someday we'll be able to do that with our budget!

Chief Family Officer said...

@Camille - Thanks, I'm really thinking of doing this but still trying to work out the details!

Unknown said...

Depositing your paycheck directly into your savings is a good way to keep your balance high to earn interest, but that interest is quickly lost in fees if you don't transfer funds in time. It adds an extra step to your process, so you have to decide if the extra interest is worth the additional time.

If your checking account also bears interest, it's probably better to keep things as they are.

Karla (ThreadBndr) said...

My work credit union just instituted a high yeild checking account that is doing a better rate than even the online banks. I'm moving to having the lion's share of my paycheck deposited there, so it will function as a savings account and for non-fixed spending.

My only worry is the record keeping. I used to keep savings, accrual (tax bills, vet bills, auto repair) and current months expenses in seperate accounts. Now that everything will be in one account, I need to figure out ways to keep the different buckets seperated.

Slinky said...

This is what I do.

I spend the money I made the previous month. Right now I am living off the money I made in November. The paychecks I receive in December are deposited to my checking. Savings would earn me some interest, but for me, the added complexity isn't worth it. So I always have a month of income + whatever is left from the current month's budget in my checking.

When I get a bill. I pay it. End of story. Even that unexpected $800 car insurance bill that came up when I switched to my fiance's plan and I had to pay the rest of the current 6 months and all of the next 6 months at once. I just sent off the money and didn't worry about it because the money was there.

When I had to replace my car unexpectedly, I used that extra buffer to bump up my down payment by about $1500. I then replaced the missing money slowly over the next three months without having to make any changes to my normal spending.

I consider that money part of my emergency fund. With $2500 in my actual emergency fund + the one month's income, I can handle all of my basic expenses for 4 months.

Between being able to easily handle unexpected expenses and never worrying about having the money to pay a bill and being able to use a simple monthly budget (which I find works better), it's totally worth any annoyance in getting going.

I use a zero based budget, so the first month I started with zero income, because I'd already spent the money from the month before. Everything I spent was 'over budget'. The next month I had income from that first month and anything extra paid off some of the overage from the first month. Each month I paid off a bit of my 'debt' to myself until I caught up.

Anonymous said...

Great point. I especially like thinking about the next check as if you really do need it. I linked to this article today. Thanks so much!

Danelle Ice / Homemaker Barbi

Anna said...

My husband and I are in the process of doing this. Part of our problem is we have too many accounts. We now have enough in savings where we can have our pay direct deposited, have scheduled transfers to pay bills, and pay all the bills automatically.

What I like about our process is once it is set up, we don't have to do anything. Savings builds automatically, our monthly balance is higher so we get more in interest, and our bills are paid without taking a lot of time (we can instead spend it making a lot of home made food that saves us on our grocery bill).

However, here are some tips we have found in the process.

1. Transfers from one bank to another take time. Usual time is 3-5 days. For example, if you have your bills set to be paid on the 15th and you are transfering money from another bank, make sure that bank transfer happens on the 19th.

2. If the above is a problem, keep the checking and savings at the same institution.

3. See if you can change your bill due dates. I have called companies and found when setting up automatic payments, they will let me pick my payment date. This way, instead of having bills due on the 10th, 12th, 15th etc - I can have them all due same day. Makes automatic the process much easier.