How to Create a Zero-Based Monthly Budget

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A zero-based monthly budget is simply a spending plan for the month, much like a regular budget. The difference between a budget verses a zero-based budget is an approach. With a zero-based budget, you start the month at zero. Total your expected income for the month and allocate all of your expenses, immediate and future, to a specific job. In the end, it should net out to zero (Income – Expenses = 0). Let me show you how to create a zero-based monthly budget.

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Zero Based Budget with Example of monthly income + regular expenses + expected expenses = zero.

Why Create a Zero-Based Budget?

A budget is simply a spending plan for your money. A zero-based budget takes your spending plan a step further. With a regular budget, you focus on how much you should allocate based on prior months. A zero-based monthly budget assesses your needs and does not assume it’s the same based on the prior month. You start the month at zero and budget each dollar of income to all of your expenses and savings goals. Check out Dave Ramsey’s Baby Steps and how I have used his baby steps to prioritize my financial goals.

When you start each month at a zero-base, you decide how each dollar funds the priorities in your life. Each dollar has a specific job to do.

I’ve been creating a zero-based monthly budget with my husband since December of 2016. Switching my mindset to this way of budgeting revolutionized our financial progress. We used monthly budgets in the past, but we didn’t maximize our plan to create any real traction. We paid down debt slowly. Since we never planned for future expenses, credit cards saved us when unexpected expenses popped up. Whenever we paid down our credit card, we charged it back up again.

Budgeting monthly has helped us battle through $72,000 in consumer debt, as we work towards our goal of debt-free living. As of June 2019, we have paid $62,000 in consumer debt and will be debt-free by August.

How to Create a Zero-Based Budget

1. Calculate your monthly income

Calculate and write down all the types of income you expect to receive for the month. Include all of the paychecks, side hustles, child support, or any other forms of cash that you expect to receive. If you ‘re self-employed or have a variable income, calculate the minimum amount that you expect to receive. Add up all of your income sources. This is your starting point for the month.

2. Write down all of your regular monthly expenses

Start out with your regular monthly expenses. Typical expenses include rent, mortgage, food (groceries and dining out), household expenses, utilities, transportation, and basic necessities. This also includes monthly insurance premiums and minimum monthly debt payments.

Estimate budget items that you’re unsure of, especially if you’ve never sat down to create a budget before. Remember, a zero-based budget accounts for all expenses. It may be helpful to look at last month’s expenses, but I caution you on just rolling this number over. Just remember that you need to account for the expenses that you think will happen in the next coming month. If you’ve used the air conditioner more last month, expect the electricity bill to be higher and budget for it.

Congratulations! You’re almost halfway done. All of your regular monthly expenses and basic necessities are funded.

3. Write down all of your expected expenses

Think about upcoming and future expenses that aren’t due monthly. Set aside an amount each month to save so you have enough money when it’s due. With zero-based budgeting, you’re learning how to focus on your financial liabilities instead of letting life happen to you. The quarterly trash bill won’t be a surprise anymore. You’ll be ready because you’ve saved for it monthly. You will start to recognize what your living expenses are, regardless if they are monthly, quarterly, or annually.

For large purchases that are even harder to predict, I suggest creating sinking funds. A sinking fund is a savings account where you set aside a little each month for future expenses. Sinking funds also cover known expenses like birthdays, anniversaries, and holidays, or unpredictable ones like car repairs.

Like before, decide how much money you will need and when you need the money. Divide the total amount needed by the number of months left. Budget that amount in your monthly budget each month. For instance, I need to replace a kitchen appliance in six months that will cost about $1,200. I’ll take the total amount needed, and divide by the months left. In this scenario, I’ll save $200 a month in a kitchen appliance sinking fund for the next six months. ($1,200 / 6 months = $200 a month to save) . I won’t rely on debt to buy it in six months since I already have the money saved up.

Saving money for expected expenses gives you a realistic spending plan. It also breaks your debt dependency when these expected expenses occur. I struggled with sinking funds at first. I didn’t think it was wise to save money when I could easily throw it at my debt. But in the end, sinking funds kept me motivated. I used sinking funds for car repairs and holidays. I didn’t have to dip into my regular budget or lower my debt payments.

4. Subtract your regular and expected expenses from your income

Add up all of your expenses from steps 2 and 3. Subtract that amount from your income from step 1. If you have any money leftover, allocate the excess to the baby step that you’re on. If you’re on baby step 1, save it in your emergency fund until you have saved a $1,000.

On baby step 2 and paying off debt? Use any leftover funds for debt payments. Using the debt snowball? Then, you will use the excess amount to the minimum monthly payment with the lowest debt balance. Maybe you’re using the debt avalanche? Then, allocate the excess to the regular monthly payment with the highest interest rate.

What if I have more expenses than income?

If there are more expenses than income, review your budget and cut out or slash items you may not need. However, I warn you to stay realistic. Don’t slash your budget just to equal zero. You’re just fooling yourself if you do this. If $500 is the minimum you spend on groceries, don’t slash it down to $350 just to balance your budget. You’ll still need to feed your family, and you didn’t really address the issue in the first place.

Slash or cut out any luxury items like dining out or entertainment. Negotiate cell phone or cable plans, or cut out any subscriptions or memberships you no longer need or use. In the end, you want all of your income allocated to a specific purpose, down to the very last penny. Keep adjusting until your expenses and income equal to zero.

If you still can’t balance to zero, you’ll need to increase your income. I know this may seem scary, but facing your fears is the first step to reaching your goals. This doesn’t always mean a second job or side hustle. You may need to increase income for a small amount of time. Look around and see if there any items that you can sell on Craigslist or plan a garage sale.

5. Track your budget.

Setting up your budget doesn’t mean that you just set it and forget it. Tracking your actual expenses throughout the month is what really makes the difference. Log in all of your expenses as soon as you can. Once you start tracking it, you will know if you have allocated enough for each spending category.

I suggest tracking it with a mobile app, so your budget is accessible at all times. A mobile app helps you and your spouse/partner track the budget simultaneously. My husband and I personally use the free version of Everydollar.

Tips to Successfully Creating a Zero-Based Budget

Budgeting Tips

  • Be honest about your spending categories. Don’t slash your vehicle’s gas budget just to balance your budget to zero. Learn where you can cut back and decrease those items first.
  • Adjust your budget throughout the month. Budgets are spending plans, and most estimates won’t exactly match the true expense down to the penny. You will be increasing and lowering amounts throughout the month. Just remember that you’ll need to adjust if this happens. If you increase an item, you need to decrease somewhere else. The goal is to keep your budget balanced down to zero.
  • Budget a little fun money. My husband and I both have a monthly personal spending budget. We kindly nick-named it our “Mad Money.” We can spend it on whatever our heart desires. In the beginning, we felt miserable and deprived since we only budgeted $40 each month. Through the years, we’ve played around with this amount and have agreed to a reasonable amount that we both can live with.
  • Budget a little for entertainment. In my crazed desire to be debt-free, I budgeted very little for entertainment in the beginning. We ended up questioning why we started budgeting in the first place. I quickly realized that it’s unrealistic to expect my family to stay at home and do absolutely nothing. We’re still very frugal in this category, but we budget a little each month for fun, inexpensive outings.
  • Budget a small amount for unexpected expenses. Even though you have an emergency fund and sinking funds, small unexpected expenses like school fundraisers are hard to predict. It’s easier to budget a small amount each month for an unexpected category. If you don’t use it, great! Send those dollars to accomplish whatever baby step you’re on.
  • You may need to increase your income. If you’ve done everything possible to cut expenses and still can’t balance your budget, find ways to increase your income. Consider a side hustle, a second job, or other creative ways to generate more income.

For even more ways to tips on how to avoid budgeting mistakes, read these two posts:

  1. Budgeting Mistakes that are Costing You Part 1
  2. Budgeting Mistakes that are Costing You Part 2

Money Mindset Tips

  • Create your budget with your spouse or partner. Both of you need to be on the same page.
  • Set aside time each week to review your budget. Talk to your spouse or partner about the budget and what progress you’ve both have made.
  • Don’t give up on budgeting, especially during the first few months. Understand that budgeting is a learning process. It will take 3-6 months to really understand your spending needs. Your first budget may not be perfect, but perfection is not the goal here. You’ll most likely forget something or estimate a category too low or high. Budgeting takes time, so give yourself a break.
  • Learn to say no. This sounds like the easiest thing to do but is probably the hardest thing to actually do. Most everyone will not understand why you’re budgeting like a fanatic and will urge you to live a little. If you have money in your budget, let loose and spend the money without feeling guilty. On the other hand, if you don’t have the money, learn to say no and don’t dwell on it.
  • Learn to be content with what you have. This again sounds so much easier said than done. When I was bored before, I would shop. Depressed that I couldn’t shop frequently, I reassessed what I owned and made them work. Contentment made me realize that I never stopped to smell the roses and give thanks to what I already owned or had the privilege to experience. I was so caught up in the next big purchase or vacation, that I failed to see how much I already owned or experienced.

More Unusual Tips

  • Consider bartering or sharing your skill sets. Instead of paying for babysitting, swap babysitting duties with another couple. If you’re handy, swap your skills for other services in return.
  • Scour your house and check for any major items that you can sell. Selling items may lower hidden monthly expenses you have overlooked. We sold three cars at the beginning of our debt-free journey. Not only did we save on gas and car insurance, but we also saved on the annual vehicle registration fees.
Zero based budget step by step showing coins, calculator, and spreadsheet.

Misconceptions about How to Create a Zero-Based Budget

1. Budgets are too restrictive. I won’t be able to have fun or go out anymore.

Many compare a budget to a diet that is restrictive, boring, and difficult. Most misconceptions claim a budget sucks the fun out of life. A budget forces them to live a sad, meager life of existence. Sound dramatic? Yes, of course, it is. I’m here to dispel those myths.

A budget is only as meager or luxurious as you make it. Budgeting is just a plan, a spending plan to be more specific. You’re in the driver’s seat. How you spend your money is your decision. If you like to eat out, then budget a little each month. If you have a special event to attend, then budget it in. Intentionally make a decision of what your priorities are each month. Tell your money where you want it to go, instead of wondering where it all went.

Going through the process of creating a zero-based monthly budget is actually very empowering and freeing. Spending guilt is almost non-existent. I actually buy more personal items than I used to. Before, guilt plagued me every time I bought clothing or makeup. Now that I have my own personal budget, I purchase items without feeling guilty.

2. I’m not in debt and have a lot of money left over at the end of the month. I’m good with money, so I don’t need a budget.

The truth is that we all need to budget. Even wealthy and debt-free families create a budget each month. Just because you have money left over at the end of the month, doesn’t necessarily mean that you’re good with money. You may not be maximizing your income or aligning your spending with your financial goals.

If you don’t have a spending plan, cash may not be maximized or saved for expected expenses. Cash may sit idly tucked away, earning little or no interest, or worse yet, spent on expensive, impulsive purchases. You may be neglecting to fund retirement, home repairs or save for unexpected medical emergencies.

3. I don’t make enough … or I make enough money so I don’t need a budget.

It doesn’t matter if you make $50,000 or $250,000 a year. If you overspend each month, living paycheck to paycheck, increasing your income won’t change your habits. You’ll just have more cash to spend each month. Earning more doesn’t instantly make you an expert at handling money.

It’s even more important to create a zero-based monthly budget when there’s cash leftover at the end of each month. Without a long-term plan, large bank balances may seem like a green light to buy whatever your heart desires. After all, the cash is not pledged to a specific purpose. It’s just sitting there waiting to be spent. You may forget that you’re saving up for a new car, vacation, or unexpected house repairs.

If you think you don’t make enough to create a zero-based monthly budget, then I want you to think about it like this. Every single one of your dollars needs to be spent wisely. You don’t have a margin of error to play with. Having a spending plan will show you where you can cut back or may motivate you to sell some items or start a side hustle.

4. I’ve already created a monthly budget, so I can just reuse the same budget each month.

I held on to this budget misconception for years. Because I thought my husband and I made the same each month, I didn’t create a new budget each month. I thought that most of the expenses were the same too, except for some utilities and random quarterly bi-annual payments. I didn’t really think that each month’s budget would change all that much.

When I sat down with my husband to create our first few budgets, I noticed each month varied greatly. When we added our expected expenses, the budget became more realistic. This was what we were missing in the past. Each month was entirely different. We budgeted more towards gas, food or clothing, depending on the season. No matter how frugal I wanted to be, there were seasonal and variable costs that I had to account for.

We have learned so much since creating zero-based monthly budgets. Unexpected expenses don’t phase us anymore. We have several saving resources to use now including an emergency fund or sinking funds. In some cases, we cash flow expenses directly from our monthly budget. Financial emergencies are almost a thing of the past. We have learned to adapt to each situation instead of relying on debt or loans to pay for them.

4. I can’t create a zero-based monthly budget because I have an irregular income stream.

With a variable or irregular monthly income stream, it’s even more important to create a zero-based monthly budget. You need a strategy if your income dips or if you earn more than expected.

After adding up all of your regular and expected expenses, you’ll know exactly how much you need to earn. Calculate the average income you expect to receive that month, and then minus the regular and expected expenses. This step is similar to Step 4 above. The difference is that you’ll adjust your budget up or down if you receive less or more income.

If you receive more income than anticipated, allocate the remaining amount to the baby step that you’re currently on. If you receive less income than expected, list areas that you won’t fund such as entertainment or a particular sinking fund.

Consider setting up a sinking fund to help normalize your income stream. Aim to save enough to cover a month when you’ve made the least amount of income. Use this fund only for income shortages, and not as your everyday emergency fund.

The Last Thing You Need to Know about How to Create a Zero-Based Budget

Taking charge of your financial future starts with knowing where your money is going. Creating a zero-based monthly budget is the best way to allocate your money. Every single dollar of your income has a job. Your goals may focus on building up an emergency fund or paying down debt. It’s all up to you.

I’ve accomplished so many of my financial goals because I create a zero-based budget every month with my husband. Our budget aligns with our family’s goals and we have paid off over $72,000 in consumer debt. We would have never made so much progress without zero-based budgeting.

Just start and don’t overthink it, You’ll learn your spending habits and what your priorities are. Happy budgeting!

Let me know what successes you have had with budgeting. If you’re new to zero-based budgeting, please share questions, triumphs, and failures.

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