Zero-Based Budget

I'm going to try and finish the post I had started yesterday.  It was nice to have it half done already! 

I talked a little other day about the how we are working Dave Ramsey's program to get out of debt.  I thought I'd come back and post a little about my actual budgeting process.  Our system is based on a zero-based budget.  Meaning that, every month, we spend our money on paper before it even shows up in our account.  This way, we can tell our money where to go instead of wondering where it went!

Today, I'll explain exactly what a zero-based budget is and I'll come back another day to explain how I plan my budget every month.  This was a hard process for me to learn!  I tend to be more of a free-spirit naturally and have had to force myself to be more disciplined and tell myself "no." It took several months of working on it to get it figured out.  So, if you try it, don't get discouraged if it is a disaster the first month!  I learned a lot from my failures.

What is a Zero-Based Budget?

A zero-based budget is one where your income minus your expenses equals zero.  This doesn't mean that you literally spend every cent you make.  Only that you assign every cent a job.  Some money won't be spent right away.  But, it will be assigned to a budget item.  By setting up a budget, you will aim to have money "left over" at the end of the month.  But, you will also know what you are going to do with that money.  Will it go in savings?  Will it go toward debt?  Will it be put aside and added to the next month for a larger purchase?

The concept comes from the "old fashioned" practice of envelope budget.  This is when you kept all your cash in envelopes designated for different things.  We actually use an actual envelope budget now.  But, I'll go into that more in a later post.

How to Create a Zero-Based Budget

To create a zero-based budget, you need to start with your expected income.  Write it down.  If you have an irregular income (like we do) it will take another step.  For now, just figure out the minimum amount that you know you will make this coming month.

Next, make a list of expenses that you expect to have during them month.  Include regular bills like mortgage, utilities, and debt payment.  Also include the things that vary month to month, like food, clothing, etc.  If you are saving up for a purchase, include that, too.  Also, make sure to include any giving you do and money being put into savings.  These budgeting items are the heart of your budget. 

Once you have your list of expenses, you will start to subtract the amounts from your income.  If, when you are done, you have money left over, this is where you get to decided what to do with it.  Assign the money a job until there is nothing left over.  Here is an example of what that might look like. 

Total Income:                 $3000.00

Total Planned Budget:     - $3000.00

                               ___________

                                    $0

Budgeted Item	Amount Planned	Amount Actually Spent	Running Total
Giving	$100.00	$100.00	$100.00
Emergency Fund	$50.00	$50.00	$150.00
Mortgage	$700.00	$700.00	$850.00
Real Estate Taxes	$200.00	$200.00	$1,050.00
Homeowner’s Insurance	$100.00	$100.00	$1,150.00
Home Repairs			$1,150.00
Electricity	$200.00	$200.00	$1,350.00
Water	$30.00	$30.00	$1,380.00
Gas			$1,380.00
Phone	$20.00	$20.00	$1,400.00
Cable	$50.00	$50.00	$1,450.00
Internet	$50.00	$50.00	$1,500.00
Food	$600.00	$547.23	$2,100.00
Car Payment	$300.00	$300.00	$2,400.00
Gasoline & Oil	$200.00	$197.49	$2,600.00
Car Repairs			$2,600.00
Car Insurance	$150.00	$150.00	$2,750.00
Debt Snowball	$250.00	$250.00	$3,000.00
Total			$3000.00

Notice that with some of the budget items, the amount spent is exactly the amount planned.  These are generally the things that you know, in advance, exactly how much money will be needed.  Often, this is because it is the same amount every month, like your mortgage.  But, with other items, the amount spent is less that what was planned.  This is great!  The difference will carry over to the next month.  Some budget items won't have money assigned to them every month (like "Home Repairs" and "Car Repairs" in the example above).

How do I Know How Much To Budget for Something?

The best way is to look back at the last few months.  Get your statement out of your files (if you are actually organized enough to do something like file!) or print one off from your bank's website (this is what I had to do!).  Then, sit down and figure our exactly how much you have spent each month on different things.  For example, look at the statement from last month and write down every time you ate out and how much you spent.  Then, take a look at the total.  You might be shocked at how much you spent!

Put every item on your statement into a category.  Some may just need to go into a miscellaneous category because they really don't fit in anywhere else.  But, try to do that as little as possible.

If you use the last couple of months to determine an average for each of your budget categories, you will have a starting point for planning next month.  You may decided that you want to cut back in an area, like eating out.  If so, plan a little less than you normally spent.  Just remember, this means you will actually have to cook at home more often!  So, be prepared and have a plan!

There are also a lot of great software and online programs you can get to help you do this.  I personally use You Need a Budget (YNAB).  I was able to create categories (it suggests several common categories to get you started), download my bank statements, assign each expense to a category, and view exactly what we had spent each month.  I highly recommend their program and have used it for several years.