Dividing your paycheck into categories for wants, needs, and savings may help you feel more in control of your spending and planning for the future.
Quick takeaways
Every paycheck you earn comes with tradeoffs: You need to cover the essentials, want enjoy a few extras, and hope to save for the future—all at the same time. But it can be difficult to balance all competing priorities. For example, only 55% of adults have three months of emergency savings.
If you’re looking for a practical way to manage today’s expenses while still focusing on tomorrow’s goals, one simple strategy can help: splitting your paycheck.
Splitting your paycheck to help with budgeting is simply dividing your income into several broad categories, such as needs, wants, and savings. For some, it works because it helps ensure those essentials, like a mortgage or rent and insurance, are taken care of, while allowing for some freedom—the fun stuff like dining out.
One note: These methods are based on net pay—the amount that’s actually paid to you, after taxes and other deductions. It assumes that you’re already contributing to an employer-sponsored retirement account, like a 401(k), or an IRA. But it includes wiggle room if you want to boost your contributions (see the ideas in the savings section, below).
Splitting your paycheck builds in structure—and limits—to your budgeting. It may help:
- reduce impulse buys
- prevent overspending in one budget category
- makes your saving automatic
- set spending limits you don’t have to think about
In a nutshell: You’re not guessing each week or month what you can afford. You’ve already decided.
There are a few (and of course, all are adaptable):
- The envelope method: You cash your paycheck and divide it into envelopes for each of your categories. This may be less practical with the electronic and online focus of much of the world, but may be useful in small doses, such as an envelope with funds for dining out, for example. Once it’s empty, your dining out for the month is done.
- The 80-20 method: 20% of your net income goes directly into savings; the rest goes toward both essentials and extras. If it’s practical for your budget, this helps to ramp up what you put aside.
- The 50-20-30 method: This option offers a little more specificity than the 80-20 method. We break it down below.
Ready to start budgeting? Principal has a customer-only tool available to help;
