By the Hour

According to Forbes magazine, more than half of working Americans get paid by the hour. So if that is how you are receiving your income, you are in great company. As far as budgeting goes, it is not too different from receiving a salary in that you roughly know what you are going to make each month. However there are some notable considerations with hourly pay and we are going to look at those today.

Now I want you to hold on to your seat a little bit, because I am going to be giving you a lot of information today, but it is extremely important to understand where your money is coming from if you are going to be able to manage where it is going. I am really trying to lay this out so that it is clear and easy to follow, so please ask questions if something is unclear.

Because there are slight fluctuations in your take home pay when you are paid by the hour (you may not get the same exact amount every paycheck), I first want to look at how to determine your monthly take home pay. The first step is to determine your average paycheck. For today’s blog we are going to focus on a weekly paycheck. Tomorrow we will look at the strategy for when you are paid every two weeks, as it definitely differs in the particulars, however there is a lot that is the same, so don’t stop reading! First of all, take your total gross income, which you can find on your recently completed taxes, and subtract your taxes that are withheld by your employer (medicare, social security, state taxes, federal taxes) for the year. If your employer withholds money for your health insurance or your 401K, you will need to subtract the yearly total of those from your gross as well. This will give you the “net total” for the year or the amount of money you get to take home and live on each year. To find your monthly average net pay, simply divide that total by 12. To find your weekly net pay, divide the yearly net by 52. This will give you your average weekly paycheck.

However, sometimes this average may be higher than what your actual weekly net pay is. Many times this is because you may do more overtime during certain seasons, which effects your yearly net, but not necessarily your weekly net. Consequently, you need to think about what you will actually have to live on every month of the entire year when you set your budget. So somewhere between your average check and your lowest paycheck amount is a good place to set your budgetable income. So multiply your weekly amount by two and you will have your budgetable income total. Thus if you make $400 a week in net take home pay (taxes already subtracted out), your monthly budgetable earnings would be $1600. You would have $800 per bill period (first and middle of the month ~see yesterday’s blog) to pay your bills.

In setting up your budget, we are going to be basing your entire budget on a four-week month. However, if you are paid weekly, four times a year you will receive an extra paycheck in your month. For 2008, those months are February (because of Leap year), May, August, and November. For this year, these months all have five Fridays in them and consequently you will get an “extra” paycheck. I am going to deal with this issue extensively later on because it actually affects everyone when it comes to budgeting. However, I am mentioning it today because if you receive a weekly paycheck, it is an enormous factor. You cannot base your budget on a five-week month because it only comes around four times a year. You need a livable budget all twelve months of the year and that means you must base your budget on a four-week month. It is better to have surplus four times a year, than to constantly be in lack and struggle to pay your bills the rest of the year.

I am mentioning this now, because May is a five-week month and you have a wonderful opportunity to set yourself up for success. If you already know that your budget is going to be tight with not a lot of flexibility, then you may need that “extra check” to live on every month. So this month, I want you to take the “extra check” and deposit it into a savings account. If you need to subsidize your monthly income, you can then divide that check by 3 and each month withdraw that amount to add to your income. It will allow you to set your budgetable income a little higher each month. For example, if you earn $400 in net take home pay a week, and on the extra week you take that paycheck and deposit it into a savings account, you would then divide that amount by 3 and withdraw $133.00 a month to add to your budgetable income. So your income for the month would be $1733.00 instead of $1600, and you would have $866.50 per bill period to pay your bills.

However, if you have more flexibility in your finances, I would still recommend putting that “extra check” into a savings account. If you don’t need that money for your monthly living expenses then it is a wonderful opportunity to begin to save towards your dreams. On a limited income, $1600.00 (from our example, four “extra checks”) can be a wonderful way to save towards a vacation, or a down payment on a house, or new furniture… whatever your dream is. My heart is not to tell you what to spend your money on but rather to spend purposefully. If you don’t have a plan in place the money will disappear, but if you have a plan, you can reach your dreams.

So that is it for today. Again please feel free to comment or ask questions. I know I have given you a lot of information, but I hope it is helpful to you in finally understanding where your money is coming from. And if your head is hurting, I want to leave you with this joke, which may feel true, but hopefully isn’t too close to the truth in your life:

See you tomorrow:)