Dave Ramsey calls it “the dreaded ‘B’ word.” It’s the budget, and it is an essential part of a healthy financial plan.
Each month, my wife and I sit down with our bills and calendar to think through where our money is going to be given, invested, and spent during the upcoming month. Being debt free (except our mortgage), this is a fairly straightforward process. There is money for giving, our regular bills, and cash needed for certain things (food, gifts, car repair, etc.). We put money away each month into accounts for retirement, college for our children, and a car replacement fund.
After a few other categories (doctor’s visits, haircuts, gas, etc.), we start to subtract from how much money we know is “coming in” that month. As the number continues to decrease, it leaves a bad feeling in the pit of the stomach at first. Finally, after subtracting the last line, there might be $30 or $40 left…maybe.
Then, monthly, we go through the same conversation. I get upset because there is, for all intents and purposes, nothing left. Maybe there’s enough to buy a couple of books or to take the kids somewhere fun, but that’s it. Then my wife reminds me that we have money in accounts that are actually making money. Our retirement is being funded every month. Our children’s college funds are underway and gaining money monthly. We have a few thousand dollars in case a car needs to be replaced, and several hundred in case a repair is needed. We have an emergency fund in place.
While it is hard on my stomach each month, we use a zero-based budget for one simple reason: it works! The point of a zero-based budget is to have nothing left, because it shows that there is an intentional, realistic focus with your money. Many, though, just look for a perfect month and plug in the same numbers month after month. It doesn’t work, because no two months are exactly alike.
Zero-based budgets are tough on some of us, because we don’t like having a “$0″ at the bottom of the page, but they keep money under control.
If you have never made a zero-based budget, here are seven steps to help you get started.
1. Treat that month as a stand-alone entity.
One of the essential pieces of information to remember is that no two months are exactly alike. One month might include a trip for an annual doctor’s check-up, while the next month might include vacation. Halloween doesn’t come in June, and back-to-school time doesn’t occur in March. Bring a calendar with you when you make your budget for the month, and it will help you be more prepared and realistic with that month’s money.
2. Work in tandem with your spouse.
There will be, shall we say, “heated discussions” at times, but the two of you will reap the benefits of working together. Each of you bring strengths to the budget, and knowledge of different areas. In our family, my wife knows far better how much money we need for food, while I am much better at estimating how much gas money will be needed for the month.
3. Look for big things that are on the horizon.
Yes, emergencies will occur, but there are other things that come up that you know are coming up! Examples might include Christmas (or other holidays), dentist visits, or vacation. It is better to save up for these than to try to pay for them out of one month’s budget.
4. Spend every dollar on paper.
As Dave Ramsey puts it, “Give every dollar a name.” Yes, you should end with a big “0″ at the bottom of the page. If you leave $200 or so and just think, “We might need it for something,” you will fritter it away on (usually) dumb purchases.
5. Use envelopes for as many areas as you must to stay on track.
We use cash for tons of areas (groceries, eating out, car repairs, gifts, Christmas, blow money, dentists, and a couple of others). They may seem extreme, but it keeps us on track, because we know exactly how much money we have to do those things.
6. Meet again when troubles arise.
Just because you say on your budget that you’ll spend $50 on car repairs this month, that doesn’t mean that’s what will happen. When the unexpected happens, you need to adjust your budget (or figure out where the money is going to come from). Meet with your spouse again and figure out how to adjust for this unexpected expense.
7. Realize you won’t get it right the first time.
Most people give up after their first budget goes out the window on the 4th day of the month! Don’t give up. Expect your first two or three budgets to stink. But, as you begin to realize how much you actually spend in certain areas (and ways in which you can cut costs, too), your budgets will be more accurate, and your meetings usually will be shorter. My wife and I can do our budget in less than 30 minutes most months.
What other tips do you have for running a zero-based budget? Leave a comment below!
{ 6 comments… read them below or add one }
I especially like the idea of thinking forward. I think that financial responsibility starts with forward thinking. After all, that is what a budget is supposed to do (not just track expenses, but limit them as well). Thanks for the post. Keep up the good work.
It’s awesome that you use envelopes to budget so many areas of your finances! Courtney and I use envelopes as well, but only for categories that we think we’ll overspend in. Medical expenditures are always kind of a “whatever it takes” category, so we use our debit cards on that. Thanks for a great post!
At first, it seemed a bit strange to have a ton of envelopes, but we aren’t too proud to have a lot of envelopes! They help us, so we’ll stick with the system. Thanks for commenting.
Adam,
Thanks for the “zero” plan. I read it and discussed it with my husband immediately. We like this plan for several reasons. It emphasizes a partnership between spouses. Everything is budgeted–no waste of God’s provision. It is flexible from month-to-month.
Janice,
It is a great plan that “forces” couples to have serious conversation. Just keep in mind, as I said in the article, that your first month (or 2) will probably not go well. It usually takes 2-4 months to really get the hang of it. Good luck!
It sounds noble to save for your children’s college fund but it’s not going to payoff like one might anticipate. If your putting it into a 529 program then it certainly won’t payoff.
My fellow readers if you haven’t noticed what going on in the world of finance then I suggest you take a few notes what we’ll see in the near to relatively near future:
—a college bubble: once colleges see a decline in enrollment because the trade-off of not attending is greater than attending will continue to grow as you see more college graduates working as bartenders etc. I just graduated with my MS in econometrics and feel the remorse of attending college. Ive met plenty of others who feel the same.
–US dollar collapse: it’s mathematically impossible to pay the debt incured. Its mathematically designed that way. The IMF already has published several papers to the “dollar problem.” Bombing other countries because they don’t want to trade oil in dollars is ungodly. Research government sponsered terrorism. Do some research on who the are edomites.
–There’s no difference between Democrats and Republicans. Once you see the light the more you see the bible come to life. Also I’d suggest giving your tithingdto biblical christian churches outside the usa. God bless you all.