budget

How to Make a Zero-Based Budget

5 Minute Read

In the movies, pirates always carry a map when they go looking for buried treasure. The map tells them where to go, what to look for, and what to avoid on the way there. And once they reach their destination, they’ll find the good stuff—gold, silver, and jewels.

That’s the zero-based budget in a nutshell. It will keep you on the path to riches, but only if you follow it!

What Is a Zero-Based Budget?

The concept of a zero-based budget is simple: income minus outgo equals zero. If you earn $3,000 a month, you want every item that you spend, save, give, or invest to all add up to $3,000. That way, you know where every one of your dollars is going. Not knowing where their money is going is what kills a lot of people’s money situations. They just look up one day and find they have no money—and no clue about where it went.

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Here’s How to Make a Zero-Based Budget:

1. Write down your monthly income.

You can do this the old-fashioned way with a sheet of paper, or you can use our free budgeting app, EveryDollar. Your income should include paychecks, small-business income, side jobs, residual income, child support, and so on. If it’s money and comes into your household’s bank account, write it down and add it up.

2. Write down your monthly expenses.

Before the month begins, write down every expense. Things like rent, food, cable, phones, and everything in between should be added to the list. But be sure to start your budget with the four walls—food, clothing, shelter and utilities, and transportation. After those essentials are covered, continue listing your monthly expenses. Your needs will vary from month to month, so you should make a new spending plan each month. A gift budget might be high in December and low in April. Focus on one month at a time.

3. Write down your other expenses.

Think through the calendar year—what expenses will you have coming up? You know Christmas is in December every year, so there’s no reason to act like it suddenly snuck up on you. Go ahead and plan for the special occasions that happen during the year, every year. Birthdays, anniversaries and holidays are set dates that shouldn’t surprise you or your budget.

Next, think about irregular expenses that can pop up. Plan for those too! Things like car tag renewal fees, property taxes, and even your insurance premiums can be budgeted for. If you set aside a little bit each month, you won’t feel the strain of an expense “blindsiding” you all at once.

4. Subtract your income from your expenses to equal zero.

Ideally, this number should be zero, but it might take some practice. Don’t be shocked or worried if they don’t balance each other out. That just means you need to do something to bring one of the numbers up, the other down, or both. But whatever you do, don’t spend anything that’s not accounted for. If you budget $100 for eating out and you’re already at $95, shop on the dollar menu for your lunch. Don’t break your plan!

If you’re spending more than you make, you need to make some cuts so your income and outgo are equal. To reduce expenses, try buying generic at the grocery store, using coupons or the store’s app, making coffee instead of buying it, or catching a carpool to work. If you need to generate more money, start a side hustle or sell some things.

Here’s the deal with a zero-based budget: Every dollar must have a name! That means you must have zero dollars leftover. If you fill out every item in your budget and come out $100 ahead (meaning you have nothing for that $100 to do), you haven’t finished your budget. You must assign that remaining $100 to something. Whatever you decide is up to you. But if you don’t give it a name, it will be spent carelessly, and you’ll end up scratching your head over that missing $100 you thought you had.

Can You Make a Zero-Based Budget With an Irregular Income?

If you have an irregular income—don’t sweat it. You can still use zero-based budgeting! It is just as easy to make a plan for an irregular income as it is for a regular one. When you budget, base your income on the lowest earning month from the previous year. Then list your expenses in order of importance. Make sure you cover the four walls first (food, clothing, shelter and utilities, and transportation).

When you do get paid, take that amount and spread it out over the items in your budget. If your paycheck doesn’t cover everything listed on the budget, that’s okay. Cover what you can. If you get an additional check during the month, pick up where the last check left off.

So Why Is Zero-Based Budgeting Important?

Having a budget (your detailed spending plan) is the quickest way to make your money goals a reality! Trying to get out of debt? You need a budget. Saving for retirement? You need a budget. Already a millionaire? Guess what—you still need a budget.

Remember, you’re the boss of your own budget. You get to tell every single dollar exactly where it will go each month. And don’t think of it as confining. Having a budget actually gives you the freedom to spend money!

Sign up today at EveryDollar.com and start using the easiest online budgeting app on the planet. It’s free!

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