Over the past couple of years the economy has been in a tailspin. With double digit unemployment, people are having a hard time finding jobs, and not many people (beyond government workers) have been seeing their incomes increase. Because times are tough most people are having to be more creative in looking for places to trim the fat, create new side incomes and keep their head above water.
What if I were to tell you, however, that most people could easily give themselves a raise without having an increase in income? Here’s how it can be done.
Zero Based Budgets
A couple of years back my wife and I took Financial Peace University, and as a result ended up doing a budget for our family for the first time in our 5 year marriage. Until then we hadn’t really bothered to keep track of where the money was going because it seemed like we just didn’t have enough to keep track of anyway. What we didn’t realize was that because we weren’t keeping track, money we could have been saving was instead just disappearing into the ether every month.
After we started doing the Dave Ramsey recommended zero based budget and a cash flow plan, however, we found that we were routinely had hundreds more in our bank account every month just because we were being conscious about our spending. It was like getting a raise!
So let’s get started!
Write Down Your Income And Expenses
Figuring out what your current situation is should be the first step in coming up with a zero based budget. Sit down with pen and paper, and set about figuring out what your income and expenses are for the month.
- Income: What money is coming into your bank account from your full time job, part time jobs and sideline income that you might have. Your regular income streams probably don’t change that much from month to month, so this shouldn’t be too hard. (Unless you have a sales job, own your own business or other different situations)
- Expenses: Go through your monthly expenses and figure out what you’re spending for necessary things like food, clothing, shelter, utilities, insurance and so on.
- Less Frequent Expenses: You’ll also want to look at your less frequent expenses that can be different from month to month. These can be things like entertainment, gas, property taxes, pet supplies.
Create A Plan To Allocate Every Dollar
After you have written down all of your monthly and infrequent income and expenses, you need to start allocating every dollar to a specific spending saving or giving category. This is called creating a cash flow plan.
For example, if you have 3000 dollars of income coming in for the month, you would allocate every penny of that 3000 dollars to one category or another. A pared down zero based budget might look like this:
- $1000 for Housing expenses ($2000 left over)
- $300 groceries ($1700 left over)
- $200 car payment ($1500 left over)
- $300 Utilities & Insurance ($1200 left over)
- $200 Gas ($1000 left over)
- $300 tithe ($700 left over)
- $100 clothing ($600 left over)
- $100 entertainment ($500 left over)
- $200 savings account ($300 left over)
- $200 mutual fund ($100 left over)
- $100 Donation ($0 left over)
At our house, the money for tithe comes out first. Next, the money for monthly or irregular expenses gets allocated. If you have money left over when you’re done with those expenses, money gets allocated to a saving, investment or giving category.
When the month is done you have allocated every dollar, and reduced the total to zero. No money goes unaccounted for.
When you start allocating your incoming funds to specific categories every month, and don’t go over those spending limits set forth in your budget, the result is that you’ll end up having more money left for saving, investing and giving every month. My wife and I found we were able to find almost $500-600 per month extra just by doing a budget and not overspending on our allotted categories. You can do the same, so why not start?
The Zero Based Budget: Review
The steps to follow when setting up your own zero based budget include:
- Figure out all your income sources and write down a figure for total net income.
- Write down and allocate for all giving and saving categories. Come up with a total for giving and saving.
- Figure out a dollar figure for total expenses, both fixed regular monthly and irregular expenses.
- Subtract total expenses and giving/saving from total net income. You should come up with zero as the final tally. If the total isn’t zero, allocate the remaining funds to a saving or giving category.
Have you ever done a zero based budget? Did it lead to decreased spending and increased available funds in your accounts? Tell us your thoughts in the comments.
I have a zero based budget but it was hard for me at first. I had to actually make myself transfer money out of my checking if there was any left over but it did force me to pay attention to my budget. There was always something I could not account for so I created a miscellaneous sub account in ING and transfer the extra to that account to keep my zero based budget balanced.
Lulu´s last post ..Tracking My Finances In 2010: May Week 1
An interesting concept.
It could probably make you feel a little better about your finances if you track it own to the last penny.
And, of course, if you see that you still have some left over after each month.
Carol Schultz-Weil says
Zero based budgeting is commonly used in business where the goal is to make a profit and not just maintain a lifestyle image or habit. That’s why it’s an excellent way to review finances especially during times when a person could benefit from a more frugal lifestyle. It’s just like counting calories is to dieters in that it makes us more aware of everything we spend and that in itself helps us to question and cut back. When you think about it making a profit it is most people’s goal. It is the profit that allows for greater purchasing power, greater savings, and more investments without going into debt. After years of planning in this way it’s hard to imagine any other method that makes cents. http://inthetrenches2009.blogspot.com/2010/04/in-trenches-zero-based-budgeting.html
Great article Peter!
I’m glad to see someone give a simple yet informative explanation of a zero-based budget. We’ve been operating on one for several years now. Of course, keep in mind that no one budget scheme can apply to every family (or individual). Here’s how we do ours. We budget to the week (as opposed to the month) since we get paid every week, pay bills every week, and the year isn’t really divided into months, it’s weeks. It’s easy to account for monthly bills still, just know how much they cost you every year, then divide by 52. Of course, we still only pay those bills monthly, but budgeting weekly keep the checking account clean. When we get paid, we automatically take out savings amounts for several items. Any ‘item’ that required payment on a frequency of more than 1 month get it’s own savings category (special offerings, cars, vacations, etc.) Tithe always comes first, so it is written out of the check book midweek and sits till Sunday. Then, any bills that we pay monthly (utils, cable, rent, etc) we just pay as they come along. We figure the price of these based on the week. Since we have a little cushion in the checking account, it’s no big deal to pay the rent when it’s due instead of trying to save up for it, we’ve already planned for it. Now, for anything that we actually pay for every WEEK (gas, food, household supplies, etc.) we don’t actually budget for. My theory on this is simple, and so far it has worked. This weekly expenses category is at the ‘bottom’ of the budget, so every week we have $X to spend on whatever else we need (this include entertainment too). So, if gas jumps up, and we all know it does and will, I can’t just stop buying gas outright, we skimp on entertainment, or put off buying something for next week, or save some somewhere else. On occasion, our expenses will line up such that we go slightly over budget for the week (had to buy extra gas, friends come to town and require more food, etc.) That’s fine, we can handle that, we just go slightly negative the next week and make it up there. We have a white board on refrigerator that starts at the budgeted amount for the week. When we buy gas or food or anything else, we subtract that from the total. Having ‘savings streams’ allows us to predict how much we can spend on big ticket items like vacations. We save for a vacation every week, and we don’t spend more than what we have when we do take the vacation. Since I’m a numbers guy, I like to be able to see exactly how much I spend per day (or week, or month, or year) on a vacation or retirement savings, or anything else. It works well for us, and is flexible enough to change with a change in income or priorities.
Khaleef @ KNS Financial says
I always thought the point of budgeting was to allocate your income completely. Am I missing something? What other type of true budgeting could one do? I guess I do come across people who only know the amount of a few large expenses – but I don’t consider that to be a budget at all.
I think you gave a great explanation of the concept of budgeting, and hopefully many will read this and begin to get their house in order.
Khaleef @ KNS Financial´s last post ..What Does the Old Testament Teach About Tithing?
Wouldn’t those that only ‘budget’ for large items really just be ‘saving’ for them. I agree. I suppose that’s better than some alternatives, but it’s still not a budget really. We allocate our income completely. At the end of the week, or month, there is nearly zero dollars remaining.
Richard Turner says
I just read your article from 2008 regarding your search for the best zero budgeting tool to match your weekly income. What can you recommend today has there been some good Apps created or a good excel doc that you recommend?
Peter Anderson says
Richard, for excel I’d recommend the tools from Tiller Money, they have a google spreadsheets and Excel integration. Tiller Money Review.
Otherwise, I still use You Need A Budget at our house.