One task that may not be apparent to first time budgeters is to create a zero based budget. My wife and I had tried to make a monthly budget before but for one reason or another, our budgets never seemed to work. Putting this step in place helped us lesson those failures and move us towards a place of continual success with our budgets.
The process of putting a zero based budget together is not hard to understand. Like any other budget it does require some planning and attention throughout the month because you might have to tweak some numbers here and there as life happens. In my opinion it’s the best type of budget to put together as it leaves no room for money to go unaccounted for.
What Is a Zero Based Budget?
There are a few simple steps to take in order to make a zero based budget.
First, determine all the sources of income that will be coming in during the month. Of course, this includes your monthly salary from your full-time job or side hustle income. However, make sure to include other sources of income you might be receiving such as investment dividends or child support. Add these together to determine your total monthly income.
The second step is to calculate all your set expenses. This would include all the bills you regularly pay each month. Items such as the mortgage, utilities (electricity, gas, water, phone, Internet, cell phone, etc.) insurances and consumer debts are what you want to include here. Total all those amounts and subtract them from the income.
By now you should have a figure to proceed to step three – figuring out your adjustable expenses. Adjustable expenses are those where you exercise a little more control over the amount you spend. Expense categories you might plug in here include food, clothing, entertainment, transportation, home maintenance, hobbies, saving and giving. Once you have the adjustable expenses set subtract them from the number you calculated in step two.
So your equation should look something like this:
Income total (Step 1) minus Set Expenses (Step 2) minus Adjustable Expenses (Step 3) = 0 (zero)
So as you can see the goal of a zero-based budget after these three steps is to have the final amount equal zero. We don’t want any amount of money left over on the bottom line of our budget calculation.
Why Is a Zero Based Budget Important?
One thing I’ve learned the hard way is the concept that money is active. It will find a place to go if I’m not paying attention.
If there is money left over on the bottom line of your budget where is that going to go? The answer is “Who knows?” It could end up in the savings account if your disciplined enough. Yet again it could go to a movie date with your spouse, a grande vanilla chai tea each morning at Starbucks or a new baseball glove for your son.
The point is you don’t know where it’s going because it’s not been allocated to a category. In a zero based budget every dollar must be assigned a category.
You have to tell your money what to go do with itself or it will exercise it’s own will on your life. It sounds ridiculous that pieces of printed paper could have this much control over us. But you know as well as I that it does when we let it.
Clearing Up Some Questions and Misconceptions
When putting together a zero based budget remember the following:
- Put the budget together before the month begins. Have a budget planning meeting where you forecast what the next month will look like. Have the budget ready to go on the 1st.
- You will have to play with the numbers in the planning meeting to get it to balance to zero. Use the adjustable expenses category to do this. Your income and the set expenses won’t typically have much leeway to change.
- Just because you allocate “X” amount to a budget category doesn’t mean you have to spend it during the month. A budget is simply a spending plan. The actually execution of that plan will vary and you may not spend the money from that category after all.
- You can change the budget during the month. However, if you add or subtract money from one spending category you have to add or subtract it from another. The budget must always equal zero no matter what changes are made.
- Make sure to include a savings line item in the budget. Treat it like an expense. Too often people just save what’s left over at the end of the month. So in essence they save nothing because they spend all their money each month. Put the savings money away at the beginning of the month so you are not tempted to spend it.
(I’d also consider following this strategy when developing your giving plan each month. Consider how much you might want to give to charity or your local church and give it at the beginning of the month so it doesn’t find another “priority” to go towards.)
Download a Budget Template
I’ve found a zero based budget invaluable in helping us have victory with our monthly finances. It keeps my wife and I from overspending and has helped our savings rate increase. I’d highly recommend it as the best budget method in terms of telling your money where to go.
If you’d like a budget template to get started with this process you can get one by clicking here. You can download a copy in either Word, Excel or .pdf format. I prefer the Excel spreadsheet as it has all the formulas plugged in to do the calculations. So you can easily play with the numbers as you figure out how much to put in each category. If you have any questions about putting a budget together you can contact me here.
Questions: Do you think a zero based budget would work for you? If not, what budget strategy would work for you? Do you find yourself ever wondering where all your money goes during the month? What frustrates you about putting a budget together?
Next Post: The Hands of the Diligent Make One Rich
Prior Post: Give the Gift of Investing This Holiday Season