This post was first published on June 19, 2008.
Budgets have a bad rap because they’re seen as shackles. Instead of getting to do fun things with money, budgets make you do boring things, like pay the gas bill, and not go out to eat.
Not necessarily. Whether you realize it, you do have a budget. Your budget might reveal that morning lattes are worth 13% of your income to you, but it’s still a budget.
Living on a budget simply means telling your money where to go – it doesn’t handcuff you from spending it.
Ever feel like money somehow vanishes every month? We did too, until we started regular budgeting. More specifically, until we started planning monthly, zero-based budgets.
Zero-based budgeting is basically putting a name to every dollar that comes your way. It starts with your income side of the equation, and line by line, the total subtracts as you allot amounts to each category, until you are down to zero.
The goal is simply this:
income minus expenses equals zero
I’ll show you an overly basic example.
The McSimples bring home $3,000 a month. So that’s the number they start with.
- giving – $300
- mortgage – $1,000
- utilities – $500
- groceries – $500
- insurance – $200
- gasoline – $firstborn
- TOTAL EXPENSES: $3,000
$3,000 – $3,000 = $0
There’s no “miscellaneous” category. There’s no money set aside for “just in case,” because you’ve already planned where every cent is going. Even if it’s going to savings, it’s going somewhere.
The key to what the McSimples did was that they planned their month’s expenditures on what they were actually going to bring in that month. They didn’t budget what they thought was ideal for each category, and then hope that amount comes in that month. That’s not even budgeting, really – that’s just writing down on paper what they wish they could spend money on. I like how Amber once coined it in the comments section – “prediction-based budgeting.”
So the key difference to a zero-based budget is that you look first at the numbers on the income side of the equation, and then you make your expenses work within the boundaries of your income. It balances. Which means, you actually have the money you’re allotting.
So the next question to consider is – if you were to write a zero-based budget for your family every month, would you keep track of it? Do you just set the paper aside and hope for the best? Do you walk around with it in your purse, analyzing every single number until you’re cross-eyed walking around Target and scared to death of putting anything in your cart?
I encourage you – prepare a zero-based budget as part of your home management every month. And then regularly (such as weekly, like what I do), enter your expenses to stay on top of how well you’re sticking to your budget. As the month progresses, you can see how well – or not so well – it’s working, and tweak it from there. I promise you it doesn’t take much time when you stay on top of it.
This is also infinitely easier to do when you have a smart, simple tool that subtracts expenses from your budget as you record them. And since this is Simple Mom, after all, I prefer a tool that’s as light and easy-to-use as possible. No bells and whistles that I really don’t need for everyday family finance management. For me, Pear Budget is that tool – I absolutely love this gem of a budgeting program. Plus, I love that I’m supporting a family-run business (who also happen to be loyal SM readers!).
How about you – have you ever tried zero-based budgeting before? Or is there another system that works better for you? Do you think it would help seal in the cracks where loose change is slipping? Or would it make your head spin with details? I’m curious.