ZERO BASED BUDGET!!
Did you see the word budget and instantly freak out???
Honestly you are not alone. According to a Gallup poll only one in three Americans prepare a detailed family budget.
There are so many reasons that families do not create a budget such as fear, stubbornness or in some cases, families just don’t know how to create a realistic budget. At the end of the day, a budget just gives every dollar a purpose.
Family budgets should not be thought of the monster that lurks under the bed whose only purpose is to make you eat rice and beans while stealing any fun from your life. Too many families think this is the case, so they avoid creating any budget.
Instead of a monster stealing the joy from your life think of a family budget as a blueprint for your money. How many people would attempt to build a house or even a playset without instructions?
Okay I see there are a few… but you can see how that worked out. Having a family budget will help you better plan for the month plus it eliminates the stress of not knowing how much money is in your bank account!
One great budgeting technique for families is called a zero-based budget.
What is a Zero Based Budget?
Zero based what?!? You must be looking at my checking account!
Full Transparency. Zero based budget is not my idea… I am not a budgeting guru who created this amazing jedi budget hack. If you read my post why spouses should be on the same financial page, you would remember that one of the most important things Michelle and I did before we got married was to take Dave Ramsey’s Financial Peace course. For our marriage and our finances this was life changing. If you don’t have time to take the course he also wrote The Total Money Makeover which gives you the same valuable information.
Got it Eric, you steal your ideas…
Errr… Ummm. Lets consider it sharing.
Okay…. Go ahead then, “share” what zero based budget is.
The concept is super simple. Every month your goal is to plan to “spend” ALL of your income! Simple math equation:
Income – Expenses = Zero
SWWWWWWeeeeeeeet! Now you are talking my language Eric. I thought we were going to be eating ramen noodles for weeks! We goin’ Sizzler!
Like I mentioned above, a zero based budget or any budget for that matter is NOT a boogie man. If after you figure out your expenses, you can go to the “Sizzler” than great! However notice how the equation equals ZERO and not a negative amount! If it’s not in the budget, DO not Pass Go, Do NOT GO TO SIZZLER!
Nuts and Bolts of How a Zero Based Budget Works
First you need to identify ALL income that your family expects for the month. Be sure to think about all sources such as side hustles, freelance work, etc.
Now the “fun” part. You get to spend all of your income… on paper. Do not skip this step! This is the actual budget piece. List all of your expenses that you need to take care of that month. For this step, savings are considered expenses. As a family you are deciding to give EVERY dollar a purpose.
Pro budgeting Tip: Most people feel budgets are TOO restrictive and abandon them within a month or two. To avoid this, make sure to include “fun” money or pocket money in your budget. This eliminates the restrictive nature of the budget and allows you to have some freedom within the plan.
As you are making your budget you will need to adjust your amounts in certain categories. There are certain fixed costs such as cable, rent/mortgage, cell phone etc. that cant be adjusted. For some reason T-mobile doesn’t appreciate it when you send them 5 dollars instead of $60 because it wasn’t in your budget… If your expenses exceed your income find categories that you CAN reduce from such as Food, Clothes, and more FOOD. When Michelle and I tried to reduced our budget it was INSANE how much we spent on eating out, groceries, and drinks such as coffee or soda at the gas station.
On the other hand, if your expenses are less than your income, you should probably donate to a blogger in need… hint hint… But seriously, if you are in this boat great! Remember savings count as expenses. This might be a good time to think about increasing the amount you are putting towards your Roth IRA for retirement or identifying larger purchases such as cars or houses that you can begin saving for.
Check out this sweeeeeet zero based budget example!
What’s the magic behind Zero based budget?
The biggest reasons this works….
1- Awareness– This is could be the FIRST time your family has sat down to actually look at how your money is being spent. It is an EYE opening experience. I know for Michelle and I, if we had money left in the checking account at the end of the month we chalked that up to a win. Creating a budget makes you more aware of how your money is being spent and has the potential to change your behavior.
2-It’s your plan– Before the month begins, you have decided how your money will be spent. If you want to go to “Sizzler” then put it in the budget.
3- Prioritization– When you sit down and make the budget, you will undoubtedly have to make some tough choices. This prioritization is actually GOOD! When you start making a budget, this part is HARD! But guess what, you don’t NEED a $5 dollar caramel macchiato every single day. That $150 dollars could go towards groceries or other monthly expenses higher on the prioritization list.
4-Spending is okay!– Remember most people have a fear of budgeting because they think it sucks the fun out of life. When you budget appropriately you can buy “stuff”. It’s absolutely okay as long as its in the budget. Having freedom to spend removes guilt that people sometimes associate with living on a budget.
High Five Dad’s Tips to a Successful Zero based Budget:
Be REALISTIC about your needs.
- The first time Michelle and I sat down to do this budget, I said put $250 dollars in the groceries column. Michelle laughed at me. Throughout our entire relationship she did most of the shopping. She knew $250 wasn’t going to cut it.
Do the budget BEFORE the month begins.
- Create a routine. The more you do this, the easier and faster it becomes. The purpose of doing it before the month begins is so there is a clear game plan going into the month and there are no surprises.
Budget EVERY month.
- I know there will be some of you out there who think they can just copy and paste this budget month over month. Sadly that is not true. Each month is different and each month has someone’s birthday, graduation, or some event that you are chipping in for a gift… Budgeting every month creates a routine which helps you stick to your budget.
Plan for the future.
- Guess what?? Christmas comes the SAME time each year. Plan for events that you KNOW you are going to spend money on. If you know each year you spend 300 dollars on gifts, then starting in January allocate $25 dollars a month in your plan to Christmas fund. Planning ahead eliminates the budget squeeze if you wait until November.
Plan for the unexpected.
- Before you do anything else, you NEED an emergency fund. Dave Ramsey suggests $1000. He is smarter than me, so sure go with that. Here is the thing, LIFE HAPPENS. If you don’t have an emergency to help cover those expenses, you budget goes up in flames and you give up. *I am so hungry I need McDonalds is NOT an emergency…
Track your monthly expenses.
- Each month check to see how much you are actually spending on gas, food, etc. By reviewing each month your actual expenses, you will be better able to budget for the next month.
Stop Reading and Put it to Action!
If you have tried a budget in the past without success or have never tried any budget before, give this a try. Commit to 3 months of implementing a zero based budget and report back to me. That is only 90 days! I promise you that it wont be EASY but it will help you know where your money is going and give it a purpose.