Find out what a budget is and how easy it is to create a zero-based budget.
What is a budget?
“An estimate of income and expenditure for a set period of time.”
Oxford dictionary
A budget is a plan for your household finances. It provides insight into your money so you can determine if your income is more than your expenditures.
It’s usually tracked over a month to month basis, but you can alter that depending on your circumstances or preferences. Monthly is common because that is how most billing cycles work. Mortgages, bills, and other types of payments often happen on a monthly basis. Reating a budget to match that cycle is convenient. Some people like to do it every other week, or after receiving a paycheck. You’ll see business and government entities release budgets for a year and financial reports quarterly.
I prefer to track it monthly because it allows enough time to see trends occur and enough time to plan ahead. It also allows a review often enough to take corrective actions when needed before a financial problem gets too severe.
There are several ways of creating a household budget. You can find a list of different types of budgets over at eat.money. There are also apps, such as Mint and EveryDollar, that will help create and track a budget for you.
What type of Budget do I use?
I prefer using a zero-based budget. This type of budget is a simple, yet powerful and effective way to track and plan our finances. We have our own Excel Spreadsheet version that we use monthly for our budget.
I also use Mint to track my transactions and EveryDollar to make sure it matches my excel sheet. With EveryDollar, I can add transactions to my budget while I’m out of the house. That way when I spend cash, I can track it and not forget about it.
What is a Zero-Based Budget?
Zero-Based budgeting is a method in which you subtract your expenses from your income. Income minus expenses should equal 0, hence the term “zero-base”. We do our budget monthly, so our monthly income minus our monthly expenses equals 0.
This doesn’t mean that we’re spending everything we take home. It does mean that we have allocated every dollar to a specific category. Bills, Shopping, Entertainment, Giving, Etc. You can see how I divide up my spending by checking out one of my net worth reports.
Related: Why Net Worth Matters
A Couple good reasons for doing the budget
- Encourages communication
If you don’t have a spouse or another stakeholder in your finances, maybe this doesn’t apply. However, there are a lot of us that do have someone we share our finances with. Having a zero-based budget will encourage communication and compromise. There is only a limited amount of money coming in, so if you increase one area, you have to make cuts to other areas.
Sure, there are lots of significant other’s that fear the budget. It doesn’t have to be that way! Take a look at it together and determine the priorities together. Make sure you both have input and an understanding of what is going on financially. - No Overspending
There is no overspending with a zero-based budget, as long as you keep to it. The budget must equal zero, so your expenses will never outdo your income. This will put a stop to your debt increasing month after month.
Also, no more overspending in specific categories. If you are having problems spending on a specific category, this type of budget will help keep it in check. Like to shop or eat too much that it’s hurting your pocket book? Limit your expenses for that category and stick to your limit.
Ready to create your own Zero-Based Budget?
Know Your Income
For those of us who aren’t retired yet, income will be largely from our paycheck. There are many of us who have side hustles and other ways of making money as well. Make sure to include those in your income.
Track Your Expenses
This one is usually a little harder than tracking your income. We all know when we get paid! However, we may not remember all that money we spent through the month. Personally, I keep all my receipts. I also use Mint to review wat I spent during the month and EveryDollar to help me keep track for when I don’t get a receipt.
If this is your first month, you probably don’t have those resources available. Give it your best shot and take a few educated guesses. You can spend time reviewing your accounts and getting a good idea of what happened. It will be easier next month, once you’ve established a way to track your spending.
Categorize Your Expenses
Now that you know your expenses, it’s time to put them into different buckets. Take a look at your different needs and wants.
Common categories are:
- Mortgage or Rent
- Utilities
- Groceries
- Restaurants
- Entertainment
- Debt (Car, Credit, Student Loans, Etc)
Here, you have a little freedom to create the categories you want. You may want to have a food category instead of groceries and restaurants. Or you might want to group bills together instead of breaking them down into separate categories.
Hopefully you find that you have some money left over after you have paid all your bills, sent your monthly payments for any loans, and put food on the table. This is where you start spending money on discretionary items, such as eating out, entertainment, or just saving the money.
Rinse and repeat
Keep doing your budget monthly, and Consistently do your budget! Tell your money where it’s going instead of wondering where it went. The first month is the hardest, but you’ll get better month after month. It doesn’t have to be perfect the first month. Keep making tweaks and adjusting it to your liking. You should be well on your way by the third month.
Make sure to account for seasonal spending and other items that don’t come up monthly.
Insurance, birthdays, anniversaries, and taxes to name a few.
Our Previously Irregular Income
What if you don’t have a consistent paycheck, such as a realtor. Or what if you work hourly and the size of your paycheck differs with each one that comes in? Mrs. Gone On FIRE was paid hourly at her former job, so this is something we had to deal with.
In these cases, do your budget with the minimum amount you know you will make. Any extra money you make will be like bonus money! When you make your budget, make a list of priorities for if you do make extra money. That way when the money comes in, you know what to put it towards.
Zero-Based Budget Example
Let’s take quick look at an example. Her name is Sally. We’ll run through the steps mentioned about.
1) Know your Income
Sally has a full-time job and takes home an even $2000 a month. She has a side-hustle that brings in an extra $300 per month.
2) Know your expenses
For the sake of the example, let’s assume that Sally has been tracking her expenses and is ready to categorize them.
3) Categorize your expenses
Last month Sally spent money in the following categories:
- Rent: $800
- Car Payment: $300
- Utilities: $100
- Groceries: $200
- Restaurants: $70
- Entertainment: $30
This adds up to $1300. This is her first month doing a budget, so she’ll assume that she will spend about the same this coming month. This leaves her with an extra $1000 she needs to budget in order for Income minus Expenses to equal 0. She adds the following categories to allocate that money:
- New Car Savings: $300
- Future House: $700
Now as the month goes on, she’ll continue to track her expenses. Once she’s used all the money from one bucket (or category), she’ll have to either stop spending in that area, or borrow money from another area to make up for it.
End of the Month
Now it’s the end of the month, and you haven’t used up every last penny in every category. It’s time to move that leftover money into one of the savings buckets. In our example, Sally might have only spent $50 dollars at restaurants for the month. That would leave her $20 that she could put towards something else, such as her new car savings or saving for her future house.
I highly, HIGHLY, encourage everyone to do a budget. If I were to suggest one thing to do with your money and finances, creating and using a proper budget would be at the top of the list. So, what are you waiting for? Go ahead and get started! Subscribe to my email list and get the Gone on FIRE Zero-Based Budget Helper for free!
FIRE away!