Tuesday, February 7, 2012

A Zero-Based Budget

If you already know what a zero-based budget is, then you are miles ahead of where I was. I knew what a budget was, and we have tried budgeting, but "things just kept coming up." Sound familiar?

I've used the cash envelope system for years and it really helps me curb my spending, especially in the groceries and coffee areas! I hate to think of what our finances would look like without that system in place!

But I had never heard of a zero-based budget. Assigning a category to each dollar? How would this work? Here are Jan and Joe again.

Jan and Joe make a monthly combined income of $500. Remember their debts? They pay $60 in minimum payments. They are also adding a $20 snowball to their budget.

They also have monthly bills, like car insurance and utilities. Let's say their monthly bills are $200. These are mostly fixed fees.

Then there are other categories that would be best budgeted with the envelope system, because they have more control over these areas. Things like Dining Out, Groceries, Retail, and Emergency Fund... you get the idea. I've marked those with an asterisk*.

Their zero-based budget could look something like this:

Monthly Combined Income: $500
  • - Monthly Debt Payments: $60
  • - Monthly Bills: $200
  • - Snowball Payment: $20
  • - *Groceries: $100
  • - *Dining Out: $20
  • - *Retail: $10
  • - *Joe's spending money: $20
  • - *Jan's spending money: $20
  • - Emergency Fund: $50
Total Left Over: $0

It's a great system, don't you think? 

Let's say Jan has book club at the end of the month and she usually spends about $5 on a cocktail with the girls. Knowing that, she needs to budget her spending money for the month, not blow the entire $20 on one fancy lunch and shopping spree on the 3rd of the month. 

We know Joe really wants a new TV. With this system, he must choose between saving until he can pay cash for it or going without. 

So, for the first time, we are trying this method of budgeting. I like it. I like seeing where every dollar is going. 

What is the Emergency Fund? We'll cover that next! 

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