Zero-Based Budget: Spend Every Dollar On Paper On Purpose

October 17, 2009 | Posted by Brad Chaffee

Do you know what a zero-based budget is? Put simply, it is a budget system that has you spend EVERY dollar, on paper, on purpose.  In other words, you will be spending your income, on paper, until you have no more dollars to allocate.  The most important part of this is to stick to the plan once you have it in place.

Personally, I use a spreadsheet to do my budget, but today we are going to keep it simple.  All you need is a yellow pad and pencil, a list of your monthly expenses, a calculator, and a desire to tell your money where to go, instead of wondering where it went.

Where To Begin

At the top of the paper, write your total monthly take-home pay. (When you are done with your zero-based budget, this number will be zero.)

Some people give 10% to charity or to their church off the top.  If this is you, do that now.

For those of you who have automatic deductions for savings, this would come next.

The next step is to budget your four walls.  According to Dave Ramsey, your four walls are food, shelter, clothing, and basic transportation.  In spite of popular belief, your four walls are more important than your credit cards payments.

Now it is time to look at your remaining list of expenses.  You must prioritize them based on necessity.  Some of which might include:

• insurance
• debt payments (minimum payments)
• irregular expenses
• toiletries
• school supplies
• pet supplies
• any replacement or repair costs
• etc.

The last thing you want to budget is entertainment and recreation.

It is also important for you to allocate some of your budget to be blown.  Not literally, but it is important to understand that even the best planned budget will have surprises.  You want to plan for those surprises ahead of time.  (Something we did was to place any unused portion of this blow money on our smallest debt come the end of the month.)

If you have spent every dollar on paper, on purpose, then you have successfully created a zero-based budget.

Additional Budgeting Tips

• spend less than you make
• creating and following a budget is a team effort
• eliminate any wasteful spending
• create an emergency fund (if you have debt your starter emergency fund should be at least $1,000)
• create a debt elimination plan (after establishing your starter emergency fund, start using the debt snowball method to eliminate your debt.)
• if you are debt free, except for your house now is the time to establish a fully funded emergency fund of at least 6 months of expenses.
• plan for retirement
• plan for kid’s college
• if all of the above is complete, develop a plan to pay off your mortgage early.

Brad Chaffee is the Enemy of Debt, and a regular contributor here at the Self Reliance Exchange. Brad has also become debt free by paying off $26,076.75 in just 20 months. Learn more about Brad by reading his bio. You may also contact him here.

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Categories: personal finance | Tags: financial planning, self reliance, zero based budget | 2 Comments »

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