The Beauty of a Zero-Based Budget

In our quest to better manage our money, we have all turned to budgeting at one time or another. And that's a good idea. Budgeting helps us see where our dollars are being spent. They help us allocate our money so that our bills get paid on time. And hopefully, if we budget right, we'll find we have a little left over to spend as we see fit.

The problem with the traditional budget is that this left-over amount is unaccounted for. If you have $200 bucks after paying all your bills, that's $200 bucks that has no purpose. Blow it on clothes, restaurants or whatever might float your boat and your budget remains in tact. But you also just threw that $200 out the window.

To fix this hole in your money pot, someone came up with the zero-based budget and what a little marvel it is. Here's how it works:

You still budget the way you always do. You list your income sources for the month and then subtract out all your various expenses. But instead of rolling over the balance or cashing it in as mad money, you keep budgeting until you've spent every last penny.

You read that right... your budget will account for every single dollar you make.

1. Calculate Your Income - List all your income sources, from the steady paychecks to the variable dividends, refunds and garage sale revenue you expect to receive in the current month. Its helpful to note which income sources are fixed (and therefore reliable) and which income sources could vary in amount (or perhaps even not come through at all).
2. Calculate Your Expenses - Just like you did with your income, list all your expenses, noting which ones are fixed amounts (such as your mortgage, your car payment, etc.) and which expenses will vary from month to month (your water or light bill for example). Be sure to include every kind of expense - from clothing and credit cards to gas,beer and hanging out with your friends. One-time expenses such as vehicle inspections and home warranties can be split up into equal payments that can be spread out month to month. Likewise, if you have a big purchase that you're planning on making - a new appliance or television for example, break it up into monthly payments and your budget will automatically help you save up for your item.

3. Build in an Emergency Fund - You're not quite done with those expenses yet. Build in an emergency fund that can be used for unexpected expenses such as car repairs, doctor visits and a new refrigerator when yours breaks down. This emergency fund is especially crucial to a zero-based budget because you won't have anything left over at the end of the month to work with. Think of it as your safety net for those "just in case" instances.
4. Calculate - now add everything up and subtract your expenses from your income. Did you break even? If so, you've just successfully created a zero-based budget. If not, you've got some adjusting to do. Increase or decrease your monthly allocations so that your expenses exactly equal your income. Remember, you want to be left with a zero balance each and every month.
5. Stick To It - Now that you have a workable budget, the hard part will be sticking to it. If you budgeted appropriately, you'll find that even your miscellaneous expenses, such as magazines and CD's fall within your allocated amounts. But if you find that you're having trouble sticking to your limits, you'll need to either adjust your spending or allow more for the categories that are giving you trouble.