How to Make a Zero Based Budget

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If you have ever listened to Dave Ramsey on TV or the radio, then you have probably heard him refer to a Zero Based Budget. A zero based budget is a very straight forward budget which works on the premise of assigning each dollar of income a task – or to put it another way,…

If you have ever listened to Dave Ramsey on TV or the radio, then you have probably heard him refer to a Zero Based Budget.

A zero based budget is a very straight forward budget which works on the premise of assigning each dollar of income a task – or to put it another way, at the end of the month, there shouldn’t be any money left over in the budget. That doesn’t mean spend it all, it just means assign each dollar a job. For example, excess funds can go toward savings, paying down debt, investing, etc.

How to Make a Zero Based Budget

A note on steady vs. irregular income. If you receive a regular and steady income as an employee, creating a zero-based budget should be a relatively easy task. It’s much more difficult if your income comes from irregular sources, such as self employment or commissions. If you receive both a regular paycheck and irregular income, you may want to work on a zero based budget for your regular income only, and use a different method to manage your irregular income.

Step One: Make a list of your monthly income

Using a spreadsheet or a piece of paper, list all sources of monthly income. Income may come from paychecks, self employed salaries, child support or alimony, etc. See how to make a cash flow plan for more information.

Step Two: Make a list of your expenses for the month

For this step, don’t concern yourself with any bills that are paid semi-annually, annually or anything other than monthly unless the payment is due THIS month. Just list all of your accounts and amount due for anything you have to pay this month. Your monthly expense list might include:

  • rent or mortgage
  • phone(s)
  • car payments
  • cable television
  • internet
  • insurance payments
  • utilities (electric, water, gas, etc)
  • credit cards
  • loans
  • child care
  • donations
  • groceries
  • entertainment / dining out

Step Three: Make a list of your non-monthly expenses

Here is where you’ll record anything that is paid on a schedule other than monthly. Divide the amount of each account on this list by the number of months between now and the day your bill is due. If you’re making your budget in June, and your life insurance is $120 and due in September, you’ll need to budget $30 each month to have enough money available when it’s due. Once you pay a bill that is paid non-monthly, you’ll divide the total amount of the bill by 12 months (if it’s paid once a year) to determine how much you need to budget each month so that you’ll have enough to pay it when it comes due again.

Some typical non-monthly accounts might include:

How do you track irregular expenses? An easy way to track your targeted savings is to use a sinking fund or personal accrual account to save up for your semi-regular or irregular expenses. See How to Open a Sub Account at Capital One 360 for more information about how to easily set up a sinking fund at Capital One 360.

Step Four: Make a list of savings goals and debt reduction goals

On this list, include anything that is not a required payment or savings contribution, but something you really want to do (and can afford to do). This might include:

  • emergency fund savings
  • education savings
  • vacation savings
  • extra payments to pay off credit cards/loans faster
  • retirement savings

Step Five: Subtract expenses from income and modify until your budget “zeros out”

The goal of the zero-based budget is to create a spending plan where your total income minus all of your monthly expenses will equal zero. If you do this the first time and end up with a negative number, you need to decrease expenses. Start by decreasing items that are not essential – like entertainment. If it’s still negative, look at your savings goals and debt reduction goals and see if you need to decrease any of these payments temporarily.

If you subtract expenses from income and get a positive number, you’ll need to increase your “expenses”. Instead of buying something new on credit to give yourself another payment however, you’ll want to increase your savings goals or debt reduction goals until you get a zero.

Need help with your zero based budget? Try You Need a Budget

If you are struggling with making a zero based budget work by using paper and pencil, then try using You Need a Budget (YNAB). YNAB is a software program specifically designed for building a zero based budget that works. The program is easy to use will get you moving in the right direction in no time!

One word of advice: It takes a little practice to get your zero based budget working smoothly. Expect it to take a couple months to fine tune it. But once you get it running smoothly, you’ll be happy knowing where your money is going each month!

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. sarah says

    Need help on kick starting my budget. I like the zero dalance down idea but how do i pay my bills thats due now and plan for next month?

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