How to Create a Zero Based Budget

  • Jul 02 2013

Learning a new concept can be tough. Not only are you trying to get things done, but you are also adding the overhead of a new process on top it. Fortunately, zero based budgeting is an easy skill to learn. You can understand the basics in just a few minutes. To understand exactly what you're getting yourself into, we've outlined the steps we take to create our budget each month.

Step 0: Include Your Spouse

Step 0? Shouldn't that say step one? Well, not really. Think of this step as a pre-requisite. If you're married, your spouse should be included in this process. You're a team and teams don't function well unless they communicate. The hardest part about budgeting isn't creating the budget, it's following it. Try to get your spouse on board if you can.

Step 1: Choose Your Tools

The first step is determining what tools you'll use to create your budget. You can use a pencil and paper, a spreadsheet, budgeting software, or something else. We recommend that you keep things as simple as possible. All you need is somewhere to list your income and expenses and then do some simple math. Don't spend too much time here. You can fine tune things later if needed. Just pick something you're comfortable with and get started!

Step 2: List Your Income

The second step is to list out every single dollar of the income that you plan to receive in the upcoming month. Each source of income should be it's own separate line item.

If you have a relatively fixed income, such as a weekly or bi-weekly paycheck, this step will be easy. All you will need to do is figure out how many pay periods are in the month and then write down the total amount you plan to receive.

If you have a variable income, things are a little more difficult. We recommend that you estimate out your income as best as you can and then budget at the low end of your estimate. To learn more, read our previous post on budgeting with a variable income.

Step 3: List Your Expenses

The third step is to list out ever single dollar expenses you plan to have in the upcoming month. This task can seem daunting. How can you possibly know what all of your expenses will be? We recommend the following strategy.

First, find a list of categories. Next, list your fixed expenses and then your variable expenses. Your fixed expenses will be items such as you mortgage, car payment, and utilities. Variable expenses will be items such as fuel, groceries, restaurants, and entertainment.

If you're having trouble deciding on a particular category, review your bank statement for the previous month or two. Doing so will give you an idea of how much you spent in each area. Don't try to be 100% accurate. Your goal is just to get close. Remember, you can always adjust things later.

Step 4: Adjust to Zero

The fourth step is to adjust the difference between your income and your expenses to zero. Unfortunately, this won't happen automatically. Here's what to do with the differences.

If your expenses exceed your income, this will probably be the most difficult step for you. It's hard to know where to cut back, especially when money is tight. Start with luxury items first and then get creative. Luxury items may be coffee shops, shopping trips, or online services. Getting creative may mean finding ways to eat cheaply at home. Although it can be tough, cutting back doesn't have to be completely negative. Our family found that we enjoyed cooking together more than eating out. Now we save more and are closer because of it.

If you income exceeds your expenses, that's good news! What should you do with it? Don't stop budgeting, use what's left over to save for your future! Here are some options to consider: start an emergency fund, pay down your debt, save for retirement, save for your children's education, or save for a large expense. Planning for you future is not only wise, but it will also provide peace for you and your family.

Step 5: Save It and Follow It

The fifth and final step in the creation of a zero based budget is to save it and follow it. Save it by hanging it on your fridge, carrying it in your wallet, or copying to your phone. It doesn't matter where you keep it as long as it's readily accessible. Then follow it by reviewing it regularly throughout the month and making adjustments as needed. Stay disciplined and don't give up! Your income is the best tool you have when it comes to getting out of debt and saving for the future.

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