Zero-Based Budgeting: A Beginner’s Guide
BUDGETING DOESN’T HAVE TO BE BORING
Let’s try this: Let’s look at budgeting as a spending plan as opposed to a don’t-spend-any-money-and-be-miserable plan. Can we do that? Zero-based budgeting is an excellent method for getting your finances in check. The cash envelope system of budgeting (read more about the cash-envelope system of budgeting here) is very similar, or a type of zero-based budgeting.
BUDGETING CAN BE FUN
Choose a method that works for you. Remember that doing nothing and having no control over your finances doesn’t help anyone. Sometimes just having an app on your phone allows you to keep to your budget. (Look at all the people who walk so much now because their wristbands are telling them how many steps they have taken!) Make it work for YOU.
Is using pen and paper the only way for you to stay organized? I’ve got you covered. Do you need your phone or your computer to enter data and keep track or your life? I’ve got you covered.
MAKE YOUR SPENDING COUNT
A zero-based budget means you account for every single dollar coming in. At the end of your monthly budget, the amount leftover is zero.
First, fill in all the bills that are constant like your mortgage, rent, car payment, cable bill, cell phone bill, etc. Next fill in what you think your budget should be (or if you’ve been paying attention – what the amounts are) for other expenses you will undoubtedly incur over the month, like groceries, gas, dining out, pet care, etc. Whatever is left over is not just to spend however you want, you need to give it a budgeting category – and in this way, you create a budget where your spending is under control, and YOU are giving each dollar a place to go. It’s liberating, really! You choose what is most important and work from there.
NEEDS VS. WANTS, DEBT, AND SAVINGS
Decide. Figure it out. What do you NEED? What debt do you have and how much can you pay back (or how much do you NEED to pay back every month) and how much do you want or need to save? WANTS come last.
AUTOMATE YOUR SAVINGS
A 401K contribution, directly from your paycheck is KEY for long-term savings. You get the benefit of pre-tax dollars being saved, and you never have the money in your hands to decide if you want to go out for dinner a few more times this month because you work hard and you deserve it. (You HAVE earned it! But you deserve a stable savings contribution so that the “future you” will enjoy a more relaxed retirement one day.)
I have a Vanguard Account that I have on an automatic monthly withdrawal from my bank account. This makes the savings, no matter how large or small, NOT an option, no matter what is going on at home. I find automatic savings the way to go (I also use Stash, and Acorns – but these are for a different post on a different day!) The money just isn’t there for me to use or decide to move around within my budget.
YOU DON’T HAVE TO BE PERFECT
If you have never made a budget before, my suggestion is to go through your old bills by 3-6 months, or a year if you are super motivated. Approximate. Don’t worry so much about being perfect – there is NO way you will stay EXACTLY within your budget the first few months – if you do? Please let me know – so I can look up to you and tell you how fascinatingly wonderfully budget-y you are!
Everyone will have different categories that need to stay, everyone will have different categories that serve no purpose being on their radar. Some will have certain things that will be much higher than others. For example, someone who needs to be dressed in “nice” clothes for work needs a larger clothing budget than someone who works from home.
Income: If you have inconsistent monthly income, you’ll need to approximate. My suggestion would be to enter a lower amount than you “think” you’ll be making, just in case. The income you enter should be your net income, this is the amount you are bringing home after taxes.
The 50-30-20 budget system really works and is a great tool to use when figuring out your budget, especially when this is all new to you. The 50-30-20 budget system says that 50% of your income goes to what you need (groceries, housing, transportation, etc.), 30% goes to what you want (travel, entertainment, dining out, etc.), and 20% goes to savings. For some they put the debt repayment in the “need” category, others put it with savings. I personally like to put debt repayment as a need and try to save as much as I possibly can. At first, 20% may seem like too much to account for savings. So start smaller, but plan on increasing, even if by 1-2% every month! You won’t feel that as much.
You can read more about the 50-30-20 budget system here.
SET IT UP – YOU CAN DO THIS!
The premise is that we set up this budget before the month starts, stay within our budgeted numbers for the month, monitor our progress during the month, and acknowledge the difference between what you planned for and what you have spent at the end of the month. Next month’s budget may have very different numbers.
Also feel free to always move a little money from here to there in the middle of the month. In other words, if you realize that you overbudgeted for gas, and you underbudgeted for groceries (this is for real, not because you overspent carelessly at the supermarket) move some of those numbers around. Minus $25 from the gas category and add $25 to the groceries category. This is ok!
CHANGE IS INEVITABLE
Your budget is a “living” document, always changing and growing as you and your family change and grow. Be open to that, and at the same time be honest with yourself about where you are overspending – or when you are putting a true “want” in the “need” category. To save for retirement, for your next vacation, for the next time your fridge is on the fritz… budgeting is the key.
Getting in the habit of writing where every cent is going takes time. Practice. You will thank yourself later. You can download the PDF for keeping in your pocket or in your bag if you would rather use paper and pen than your note-taking app on your phone. Otherwise, I have created a google doc. Please remember to create a copy before you start using the Google Doc. See links below.
Whichever you choose – there isn’t an option of “writing it down later.” I promise this doesn’t work. Write it down EVERY time you spend money. If you don’t have your smart-phone available at all times, then print out a few of the Spending Lists (links below!) and keep them with you. Once a day, update your budget spreadsheet with the new amounts.
This is your first step. Keep track of every penny. It’s essential, and it’s not punishment, it ends up being very freeing knowing where your money is going.
NOBODY’S PERFECT (ANOTHER REMINDER)
Don’t worry that you won’t be perfect at this for a while. Until you are indeed following every dollar (which is not difficult if you keep a budget), you really have no clue as to where your money is going. And that’s ok. But it’s time to start paying attention. Over the long term, keeping a budget leads to manageable debt, room to indulge more frequently, and savings in which to retire comfortably. Makes sense, we just have to do it. You have several options of how to organize yourself and your finances. Be in charge of your money. Your future self will thank you much. Give every single dollar a job.
Go and start a zero-based budget! You got this!
ALL LINKS ARE BELOW
Compounding Joy Zero-Based Budget SPENDING LIST PDF
Compounding Joy Zero-Based Budget Spreadsheet PDF
Compounding Joy Zero-Based Budget Google Sheet
Compounding Joy Instructions for Zero-Based Budget Spreadsheet
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