How to Create a Zero Based Budget

How to Create a Zero Based Budget

Creating a zero based budget is a tremendous way to get a handle on your monthly budget. It can help you stop the wasteful spending that is damaging your ability to get out of debt. According to Dave Ramsey, America’s foremost authority on intelligent finance, ninety percent of the people in our culture buy things they cannot afford. I would venture to guess that most of these people have no idea how much money they are wasting each and every month.

The word budget frustrates people. Not creating a budget, simply the word budget. Why should anyone or anything tell me how to spend my money? I am an adult after all. This kind of thinking can get you into trouble faster than anything else. The numbers never add up do they? Even when you think you will have some excess funds at the end of the month, it never happens. Creating a zero based budget will allow you to gain control over your money, and in the process, gain your life back.

Before you begin, you need to determine how often you receive income. As I get paid every two weeks, I go through this entire process every fourteen days. You will need to adjust the frequency that you need to do this based upon your personal situation.

1. Write down all sources of income for this pay period. If you happen to be a salaried employee, this step is a bit more simplistic. If you are an hourly employee, or work on commissions, take a n average of the last few months. Personally, I would use the last three or four months if your income has been relatively consistent.

Don’t forget to include any additional income that you earn from places such as eBay, Craigslist, etc. A great way to earn additional income is to write for revenue sharing sites such as Infobarrel. It does not take long for this income to start really contributing to your bottom line.

2. Write down all of your expenses for the next pay period. This most effective way to do this is to simply grab all of your bills from the previous month. Make a list of anything that is due within this pay period. Include everything! The obvious bills include things like your rent or mortgage, utilities, power, car or truck payments, insurance (life, car and auto), cable TV, and phone (home and cell). In the beginning I always forgot one or two, so I created an additional category called miscellaneous, and threw $10 into each pay period. This helped to ensure that if I forgot something big, I would have at least something to pay towards it.

3. Now that you have identified all of you income and expenses, it is crucial that you identify your expense types. Typically, expenses can be classified as either fixed amounts, semi-fixed amounts, or variable amounts.

Fixed expenses include things such as your rent or mortgage and car payment. These expenses are also usually considered to be the important bills; things you have to pay each month. Semi-fixed expenses are expenses that do not fluctuate much from one month to the next. In most cases, the bill is within $10 to $20 each month. Example may include your cell or home phone, cable bill or TiVo.

Variable expenses can fluctuate wildly from month to month. For example, I pay my water bill once every three months. Based upon the amount of water I use during this time, my bill can vary as much as $100.

Once you have each bill categorized, make a list starting with the fixed expenses, followed by the semi-fixed expenses and ended with the variable expenses.

4. Now it is time to start the actual zero based budget process. Begin by assigning money from your paycheck to pay fixed and/or semi-fixed expenses. These expenses tend to be non-negotiable and may include negative ramifications if you do miss a payment. Your mortgage lender will not be happy if you decide to pay something else instead of paying them.

Assign remaining income to variable expenses. With any remaining income, assign these dollars to pay for variable expenses. To determine how much these expenses are likely to be in any given month, I usually take the last four times I paid this bill and create an average. I use this average to determine what I use in my zero based budgeting process.

5. It is now necessary to adjust your expenses until your income equals your expenses. I find this step to be the most challenging step. It is here that the budgeting process help define what is important to you; in other words, it determines your values. What do you find important? What do you spend money on that you could do without?

If you have a position balance, that is great. When I began doing this every month, I never had a positive balance. In order to be a true zero based budget, you must assign every dollar of income a job to do.. In this circumstance you could pay down your debt (i.e. debt snowball), save for retirement or your children's college, give more to charities, etc.

If you have a negative balance, do not get discouraged. It is here that you must re-define necessities! Identify what is important to you and is a necessary part of your life. Eliminate anything that you do not absolutely need. Once you have cut as much as you can, get a second job and earn more money. It will not be forever, just until your income exceeds your expenses.

6. Review your progress every week. Knowing where you stand, in a financial sense, at all times really improves this proves. There is truly something magical about telling your money where to go instead of wondering where it went. I like to think of my money as my employees. I tell them what I need them to accomplish for me and when they should accomplish it.

Once my income started exceeding my expenses, I was able to begin building an emergency fund to cover six to eight months of expenses, should something unfortunate happen that would require me to miss work. Creating a zero based budget can help you get a hold of your finances and control your future.