How to Create a Budget Using Your Pay Stubs: Full Guide
October 23, 2023
Budgeting your expenses is necessary to get the most out of your earnings and stay ready for any economic crisis the world may face. Developing a “pay stub budget,” which is anchored in your official net pay after taxes, is a smart way to keep your finances in check.
Devising a pay stub budget essentially means using your pay stubs as the basis for creating a budget that’s in accordance with your lifestyle and that fosters long-term financial health.
If you want to improve your financial literacy, this guide will show you how to create a budget using your pay stubs.
- A pay stub budget is a money management approach that involves using pay stubs as a reference for creating a realistic budget for a given period.
- Pay stubs detail an employee’s gross and net income, salary rates, taxes, deductions, and other salary or wage adjustments.
- Create a budget plan using your pay stub by calculating your net earnings and deductions and identifying your essential and non-essential expenses.
What Are Pay Stubs?
Pay stubs, also called a pay slip or pay check, are documents that enumerate an employee’s earnings and deductions in a pay period. They detail the total gross pay based on the employee’s hourly or regular rate and the number of work hours completed in a given payroll cycle.
Also included in pay checks is the total amount withheld for the following deductions and adjustments imposed on the employee’s wage or salary:
- Federal, state, and local income taxes
- FUTA or SUTA
- Wage garnishments (if any)
- Retirement contributions, such as 401k and Roth IRA
- Life and health insurance premiums
- Paid time off (PTO) or overtime pay (if applicable)
- Union dues
Income taxes, FUTA/SUTA, and FICA mandatory deductions on employee earnings. Wage garnishments are also mandatory because these are court-ordered payments that an employee must fulfill to cover child support, penalties, alimony, or existing loans.
Meanwhile, deductions for life and health insurance premiums, retirement contributions, and union dues are voluntary. In other words, employees can elect to have their employers withdraw a portion of their income to pay for the said benefits.
At the bottom of the employee’s pay slip are their net earnings, or their total income after taxes and deductions are subtracted from their gross pay.
Pay stubs can come in either printed or electronic form, depending on the pay stub requirements in each state.
How to Create a Budget Using Pay Stubs
There are six critical steps to creating a paycheck budget plan using your pay stubs:
Step #1. Gather Your Financial Documents
Gathering your financial documents is crucial to preparing a pay stub budget. It establishes a solid foundation for your budgeting plan.
Your financial documents include your pay stubs, bank statements, credit card and utility bills, and receipts.
You can also include IRS forms such as your W-2 form (if employed under a company or business as a regular employee) or a 1099 form (if you are a freelancer, independent contractor, or self-employed).
W-2 forms summarize an employee’stotal annual earnings and withheld income taxes, while 1099 forms provide information on an independent contractor or freelancer’s nonemployment income.
Here’s a pro tip: Use a W-2 or 1099 form generator if it takes a while for your employer or client to release copies of your tax forms. The last thing you want is to incur unnecessary penalties for receiving your tax forms past the IRS deadline and filing your taxes late.
Step #2. Analyze Your Income & Deductions
The next step in creating a pay stub budget involves examining your income and the deductions imposed on your salary or wage.
For regular or W-2 employees, look closely at your net income, or the amount you receive after taxes and deductions.
Also, if you recently updated your filing status or tax bracket because you got married, widowed, or granted a salary increase, your W-2 form and pay stubs should reflect the changes in your earnings and withheld taxes.
Analyzing your income and tracking your taxes can be trickier for independent contractors, self-employed, and freelancers. It all depends on the nature of your work and how frequently you get paid by your clients.
Consider using an online pay stub generator to record all payments sent to you by your clients. It takes minutes to fill out the ready-made templates, and you can also take advantage of the built-in calculator feature to ensure accurate calculations for your taxes and deductions.
You might be wondering whether making a pay stub is illegal. Generating your pay stubs using an online generator is perfectly legal and acceptable as long as you input 100% correct, up-to-date information.
Step #3. Calculate Your Net Income
Your net income shows your earnings after taxes and deductions. It reflects your net worth more accurately, giving you better insight into your current financial health.
Your net income is already calculated and declared in your paycheck if you work for a company. You can also check your bank statements to verify the amount deposited by your client into your account if you make a living as a freelancer or an independent contractor.
Step #4. Classify Your Expenses
Next, identify your essential and non-essential expenses.
Examples of basic needs or essential expenditures are:
- Child care
- Healthcare services
- Mortgage or rent
- Debts or loans
- School expenses
- Court-ordered payments
Non-essential expenses are payments that include, but may not be limited to, the following:
- Entertainment or leisure
- Specialty beverages
- Tobacco and alcohol
- Vacation and eating out
- Other expenses related to a particular interest or hobby
Create a spreadsheet or write down your expenses to make your list more organized.
Step #5. Create a Budget
There are several approaches to how to make a budget plan. This article focuses on creating a pay stub budget using the 50-30-20 budgeting strategy.
The 50-30-20 rule entails dividing your income into three categories: needs, wants, and savings. About 50% of your after-tax earnings go to your needs, 30% to your wants, and 20% to your savings.
Here’s an example.
Let’s say that, on average, you earn $4,317 a month. Here’s how your pay stub budget should look if you follow the 50-30-20 rule:
Monthly net earnings: $4,317
- 50% (Needs): $2,158.5
- 30% (Wants): $1,295.1
- 20% (Savings): $863.4
Your needs refer to your essential expenses or what you must pay for your basic needs.
Wants are optional expenses that you may only sometimes shell out money for but can leave a dent in your budget depending on how expensive your wants are.
Your savings refer to money you set aside to create an emergency fund, make investments, or contribute to mutual funds. Think of your savings as a future-focused expense; it is meant to establish a solid foundation for your life goals and plans in the coming years.
The rule offers a simplistic approach that anyone can easily follow and incorporate into their spending habits.
Take note that a pay stub budget is quite different from a payroll budget. Companies use a payroll budget to record and estimate all operational costs, specifically the expenses associated with hiring, training, and paying employees.
Step #6. Track & Monitor Your Budget
Tracking and monitoring your pay stub budget ensures you avoid overspending your money and strictly follow the amount allotted for your daily, weekly, and monthly costs.
To keep tabs on your budget more effectively, prepare separate pay stub budget plans each time you receive your salary. This practice is more effortless if you are a W-2 employee who gets compensated on fixed dates or days each month because you can budget your income ahead of time.
If you are a freelancer or independent contractor who earns money from multiple projects or clients, try to negotiate with your clients and request that they send payments to your services at fixed intervals every month.
In this manner, you can align your budget plan with your preferred pay schedule and the payment due date for each bill. You can also adjust your routine and stay on track with your finances.
3 Tips on How to Create & Stick to a Budget
Now that you know the crucial steps in creating a straightforward and effective pay stub budget plan, below are additional tips to help you stick to your money management plan without fail.
Set realistic financial goals
Is your objective to save money, pay off your debts, or purchase an estate? Do you want to be financially secure by the time you retire? If so, start small and keep your goals practical.
Think of it as something akin to drawing a roadmap. Before you reach point Z, you must figure out how to get from point A to points B, C, D, E, and so on until you are finally close to your key objective.
Secure your financial documents
Keep all your pay stubs, receipts, billing and bank statements, and other financial documents in a secure folder. Better yet, save digital copies of your financial records whenever possible.
You will likely need your income, tax, and billing records when reviewing your expenses and adjusting your pay stub budget plan.
Adjust your budget as needed
Aside from knowing the basics of making a budget, it is also important to assess when it is best to adapt to economic changes and modify your existing financial plan.
For example, if the prices of essential goods skyrocket over the succeeding months, reduce the percentage designated for your wants and decide whether to add more to your needs or save.
Indeed, preparing a pay stub budget can seem daunting and tedious—but that’s if you haven’t clearly defined the different expenses that consume your hard-earned money.
As long as you have a clear financial goal and can objectively pinpoint your essential and non-essential spending, improving your finances becomes more manageable than you initially thought.
Using Pay Stubs to Create a Budget FAQ
#1. How can I create a realistic budget using pay stubs?
You can create a realistic budget using pay stubs by taking note of your mandatory and voluntary deductions and your net income. Doing so gives you a concrete idea of the total amount you can pay for your expenses and other essential expenditures to consider when distributing your payment for specific purchases and needs.
#2. How to calculate net salary from pay stubs?
To calculate your net salary from pay stubs, first get the value of your gross earnings. Next, subtract all deductions that apply to you, such as taxes, life and health insurance premiums, and wage garnishments, from your gross pay.
The resulting value is your net salary.
#3. How do you create a budget with irregular income?
To create a budget with irregular income, first list all your sources of income. Next, assess your average income and baseline expenses each month.
Subtract your average expenses from your earnings to determine the amount you should allot for each cost. Adjust your budget as needed, and dedicate a significant percentage of your profits to your savings and emergency funds.
#4. Why should I use pay stubs to create a budget?
Using your pay stubs to create a budget is straightforward and practical. Your pay stubs contain all the essential details about your salary rate, taxes, and deductions. As a result, you have an accurate reference to build a feasible and realistic pay stub budget.
#5. How can I create a budget if I don’t have pay stubs?
Use a pay stub generator to create a budget even if you don’t have pay stubs. Pay stub generators offer built-in calculators for accurate calculation of your mandatory and voluntary deductions, plus templates to ensure you input complete and essential income information.
#6. What is the difference between a pay stub vs paycheck?
The terms ‘pay stub’ and ‘paycheck’ refer to the same thing—a document used to record income and deductions after completing a pay period or completing a client project.