If you were to ask a group of people how they currently budget, the majority would say that they just use an app like Mint to track their expenses or they don’t budget at all.
A solid financial coach would tell you that a zero-based budget is the most effective way to budget. A zero-based budget is one that gives every dollar earned a responsibility before it ever touches your account.
This doesn’t mean that your account hits zero every month, but, rather, that there is no dollar unaccounted for. For example, any extra money you have after covering your necessities would go directly towards paying down debt, savings, investing, etc.
Here are the steps to creating an effective budget specific to each month.
Create Some Goals. In order to keep you motivated and on track, start by listing some short and long-term financial goals for yourself. What would you like to see happen in your finances within the next year? 5 years? 10 years? 40 years?
Some examples would be:
- My goal is to be debt free within 3 years.
- Our goal is to save up $30,000 to pay for college tuition in 13 years.
- Our goal is to save $5,000 each year to take an annual family trip out of state.
- My goal to save $10,000 this year.
- Our goal is to save $100,000 to buy our first home cash within 6 years.
Writing financial goals specific to your situation provides you with long-term vision and short-term motivation. As you get into creating your monthly budget with your goals in mind, your priorities will lean more towards your goals and away from random activities that only hinder your progress.
List Your Income. The biggest financial problem that a majority of Americans have is spending more than they earn. That is exactly why the next step in the budgeting process is to list your monthly income. You have to know how much you’re expecting to bring in before you can properly budget it.
For those with irregular incomes, you’ll want to take a 3-6 month average and use this number as your base. As the month progresses, you have the ability to make updates to your projected budget, however, an irregular income is not a valid excuse for not budgeting.
List Monthly Necessities. There are a few expenses that are necessary and happen every single month. Some examples are: tithing, saving, groceries, rent/mortgage, childcare, insurance payments, debt payments, electricity, water, gas, etc.
These are the things that would severely impact your life in a negative way if they weren’t covered, so you want to start by making a list of these items and their amounts.
For this step, only concern yourself with items that are coming out of your account during the upcoming month. You can pull your last bank statement to get the most accurate data.
List Non-Monthly Necessities. This next part is where a lot of people tend to get tripped up without a budget. You must account for all necessary expenses that do not come out of your account monthly.
This could be: insurance payments (for those who pay in full vs monthly), taxes, HOA dues, regular doctor visits, auto registration and inspections, etc. Again, we’re focusing on things that would negatively impact your life if they weren’t covered in a timely manner.
List these expenses, divide the total amounts due by the appropriate number of months, and write down just how much each would cost you if you were to pay them monthly. What this does is eliminate the surprise factor and allows you to be intentional in ensuring that the money is there when you need it.
List Everything Else. Once you’ve gotten the monthly, quarterly, and annual expenses written down, it’s time to move on to everything else. Here is where you begin to list things like entertainment, cable, youth sports, Netflix, and dining out. (Dining out is not a necessity.)
Also, you’ll want to list expenses like Amazon Prime and online gaming subscriptions that bill annually, and break those down into a monthly expense. Again, this allows you to account for it throughout the year, because the last thing you want is an unexpected $99 charge in a tight budget month.
It’s important to set your budget each month because there are special instances in certain months that won’t apply for other months. For example, your gift budget in May (Mother’s Day) just may be higher than it is in April. The amount you spend on gas in December may be more than the amount you’d spend in January if you plan on driving somewhere for the holidays. Remember, it’s all about being intentional.
Income-Expenses =Zero. As we stated earlier, a zero-based budget means assigning a responsibility to every single dollar. That doesn’t mean that you spend everything, but, rather, that you know where each dollar is going.
If you’re in debt, get through all of your essentials and use the extra money to start working your debt snowball by sending that extra cash to the debt with the lowest balance. The sooner you get done with debt, the sooner you’ll have the funds to do the things that you truly want to do.
Once you’re out of debt, you can start assigning cash to a vacation fund, an appliance replacement fund, a brokerage account for investing, and many other things. The point is to give every dollar an assignment before the month begins no matter where you are financially.
Track Expenses. So you’ve set your goals, listed your income, subtracted your expenses for the month, and the math equals zero. What next?
At this point, you want to track your expenses during the month. Tracking your expenses keeps you aware of what your limits are as you go through the month.
Knowing where you are in each category before and after making a purchase is a key component of a successful budget, so find an app or system that works well for you and stick with it.
In conclusion, I’d like to make you aware of the fact that it takes on average 2-3 months of consistency to really get the hang of budgeting. You’re going to mess it up, get frustrated, and contemplate quitting during that time, however, take some time to remind yourself of your goals when it gets challenging. The reward of knowing exactly where your money is going before the month gets started is well worth it in the end.
Below you’ll find a Monthly Cashflow Plan to help you get on the right track. If you need personal assistance with the budgeting process or accountability to keep you going, you can book a session with a financial coach by clicking here.