A Zero Based Budgeting System

Zero Based Budgeting

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in Budget,Cornerstone Series,lowtech

I honestly believe if you could pick only one personal finance tool to take with you on a desert island it would be the zero based budget.  Why would you need a budget on a desert island?  I don’t have time for these ridiculous questions.  We’ve got some learning to do.  There is tremendous power in budgeting, glamorous no, empowering, yes!  A good friend used to say “Only floss the one’s you want to keep” sarcastically about dental care and the same adage is true for finance “Only budget the dollars you want to keep.”  If you aren’t telling your money where to go, it’s telling you and more often than not for our family it was saying “Go out to eat.”

Zero Based Budgeting Basics

I don’t want to patronize anyone a budget is a relatively simple thing but let’s cover the basics.  I make money somehow (if you don’t you’ve got some other problems that FiscalGeek can’t help you with maybe talk to Dan Miller) that money is called income.  I spend money (very well thank you) that’s called an expense.  A spreadsheet, a piece of paper, online software, iPhone Apps etc can all be used for budgeting.  For your first go around I would suggest a spreadsheet or some paper.  There are about 9 billion forms out there, I haven’t bothered to create my own because I couldn’t come up with anything new or innovative there I would just start with Dave Ramsey’s Forms to get you going.  It’s a relatively simple exercise start at the top with your income and then keep a running tally of your expenses until you are at zero dollars.  There you have it you’re zero based budgeting. I have trivialized the process but in the nuts and bolts that’s it.  The challenge is not typically the technical but rather the behavioral.  You need to keep at it, and you absolutely need to allow yourself and all involved grace.  I still vividly remember that second conversation my wife and I had and my frustration that we weren’t just adhering to the first written budget.  It takes several go rounds to home in on it but keep reading and I’ll give you some helpful tricks.

Variable ExpensesLunch Money

This is where budgeting gets good or derails, slams into a prison bus and causes Dr. Richard Kimble to run for his life.  Let’s face it, life has some variability to it.  Things like home expenses, car repair, medical bills, school expenses, birthday parties just seem to show up.  The key is to plan for that variability and build buckets for those types of expenses.  This is where it gets tricky, how do I maintain these buckets, know how much I have in each bucket and how much should I put in there?  First you need to sit down and decide which categories you’re going to create and call them out.  You can then figure out how much you should contribute per month in there based upon past spending or take what you think you would spend in the year and divide by 12 for each month.  This is also called a sinking fund or lump sum type system.  A great example would be Christmas.  I happen to celebrate Christmas and celebrate it every year.  We sat down in January and determined that we wanted to spend a certain amount of money let’s say $1000 total and then we merely divide that by 12 for our monthly payment of $83.33.  Great that’s easy I budget for that each month and come next Christmas I pay cash and have a capped spending limit.

Yeah, yeah that’s great and all but what about something more dynamic like health care when I don’t know when I will spend it?  Well you need some way to track that and you can keep a monthly spreadsheet that tracks your balance in that category from month to month or you can create a savings account with sub savings accounts and put your money in there and pull it out when you need it or…. you can use software to track that for you and make your life infinitely easier.

There are a variety of personal finance software packages available and I have tried and reviewed most of them. I always come back to You Need a Budget. It’s built entirely around the idea that you are zero based budgeting which seperates it from about 90% of it’s customers. It’s not perfect but in my opinion it’s the best out there.

I’m just going to assume you are using YNAB for this portion and why I’m such a big advocate is that I have my variable categories setup and it will actually track my balance of that spending category from month to month.  That’s right, I budgeted $50 for car repairs this month but I have $79.24 leftover from months past so guess what I’ve got a $129.24 balance in that category now I don’t have to guess or pray when it comes time to replace the serpentine belt in my truck.  I cannot tell you how much stress is removed by this simple method, you can just pay for things and not worry.  Using software to track your expenses also allows you to keep it in a central account because your working off of that rather than following the balance at your bank.

A bit about Goals

Honestly speaking if you do not have specific fiscal goals in mind then a budget is just going to be a headache.  Debt reduction is as good a reason as any and that’s exactly what got my family on a budget.  We realized that we were making okay money but somehow when we really thought about it we were still broke.  Some other reasons might be to save for a larger purchase, to save for retirement, to purchase a home, to send your kids to college, to give, or all of the above. If you would like some further motivation to keep reading in “The Millionaire Next Door” of 385 respondents worth more than a million dollars when asked if they used a budget 83% stated they did. So why would a millionaire need to budget?

They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.

Dave Ramsey bestselling Author, Radio Host and financial advisor often says that when you budget your money you feel like you get a raise. You will have the benefit of reaching the end of the month without surprises because you sat down ahead of time to prepare.  Write it down, and stick with it for 90 days and you will see a difference in your financial life and more than likely your personal life.

Join us in Part 2 where we’ll talk more about tools and specific examples of zero based budgeting. You can subscribe via RSS to be sure not to miss the next installment or also subscribe via email.

Zero Based Budget System Part 2>>

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{ 6 comments… read them below or add one }

Dustin 2009/06/11 at 10:35 pm

Great post. Well said. The reason I looked over YNAB was because I couldn’t get a month ahead to even make it work. I used Mvelopes for about 3 years but just recently quit to use my own tool. I would like to invite you to check it out before your follow up post. http://inzolo.com

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Paul Van Lierop 2009/06/11 at 10:49 pm

Hmm yes I was hung up on the buffer too but I just treat all my income as supplemental budgeted this month. I’ll check out your tool thanks for the link.

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Dustin 2009/06/12 at 5:40 am

Cool, thanks. I guess I should have added the disclaimer that I just opened it to the public last week. I’ve been using it for a few weeks so it works, but there may be some issues still and some gaps to fill. Please let me know if you encounter problems of if you have questions on how something works.

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Lynn 2009/08/30 at 10:29 am

I am enjoying your tips but I am not a technology geek – over 50 years old. I want to share them by e-mailing, but under the share section it does not give an option for e-mail. It says 6 other options that I don’t even know what they are, what they do, or how to use them – like digg, stumble upon, tipod, twitter, etc……
What happened to being able to send things to peoples e-mail??? Can you add that as an option?

Thanks, Lynn

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paul 2009/08/30 at 9:30 pm

Ask and you shall receive Lynn. I added 3 new features, one to just email, the 2nd probably more what you are looking for will let you create a PDF of the article and email it off or the 3rd new option to just print an article outright. Thanks for reading.

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FinanceDad 2009/12/28 at 8:57 am

It’s not very difficult to create a budget, it’s hard to stick to it.
.-= FinanceDad´s last blog ..GAP Insurance ““ the what, when, and who to buy it from =-.

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