Using the zero-based budgeting system has significantly helped Dustin and I while on our debt-free journey. In a quick overview, it’s where you zero out every paycheck. Income minus bills & expenses equals the remaining amount you can throw at your debt. Once you throw the remaining amount at your debt, your budget is now down to zero.
Let me explain in four easy steps. First grab a sheet of paper or open up Excel or Word and let’s get to working on a budget for you!
Step #1: List your monthly income
Write out all sources of income. If you are a single-income household, that’s fine. If you are a dual income household, great! We are just looking for all sources of income. This can include paychecks, money you have from self-employment, child support, alimony, etc. Next, write the dates you receive such income next to the income. Here’s our income…
- Kara – paycheck, 15th and last day of the month
- Dustin – paycheck, 15th and last day of the month
Dustin and I lucked out since we get paid the same days. So every month we have two budgets – one for the 15th paycheck and one for the paycheck on the last day of the month.
Step #2: List all expenses
Now, if you’ve read my previous posts, you will remember how I walked you through creating your debt snowball sheet. If you haven’t seen it, check it out here.
Grab your debt snowball sheet. When you are listing all of your expenses, you want to write down the name of the account (i.e. Capital One, Sallie Mae, rent, etc.), the monthly payment amount and the due date.
What constitutes a monthly expense? You have two categories. The first are all the debts listed on your debt snowball. The ones that once paid off will go away forever. Then you have your other monthly expenses that fall outside of those debts. Here’s a list of mine: rent, cell phone, car, internet, Netflix, Hulu, daycare, cash envelopes and sinking funds. Here’s an example of this how to go about this step of listing every single monthly payment:
- Rent – 1st of the month – $1,300
- Cell Phone – 15th (autopay) – $100
- Internet – 17th – $53.20
- Capital One – 22nd – $105
Step #3: List out all non-monthly expenses
These will be known as your sinking funds. If you’re anything like me, I’m always thrown off when one of these non-monthly expenses comes up, like my car registration or AAA renewal. Enter… SINKING FUNDS! I just recently wrote an article about our sinking funds here. Check it out!
Write out every non-monthly expense for step #3. Below is a sample list of ours:
- AAA membership – $98 in September
- Car Registration – $25.50 for car inspection and $76.25 for car registration in July
- Life Insurance – Our total for our term life insurance per year is $1500. Mine is due in May and Dustin’s is due in July.
We added up all car funds – AAA membership, car registration, car inspection, oil change cost and new tires – and divided that total amount by 24 pay periods. For us, it adds up to $80/pay period. This makes up our car sinking fund. Our sinking funds total is $188 per pay period. Every time we get paid, we transfer that amount to our savings account. All of our sinking funds are in one savings account. When we need to use the money, we transfer the money from savings to checking.
Step #4: Subtract your expenses from income
The goal here is to zero out your budget. Since Dustin and I get paid the same two days, we have two budgets per month. One for the 15th paycheck and one for the last day of the month paycheck. All the bills that are due between the last day of the month and the 14th get put on the budget for the last day of the month. Then all bills due between the 15th and the day before the last day of the month, get put on the budget for the 15th paycheck.
Example: 15th paycheck – List all income, minus all above referenced expenses between the 15th and the last day of the month. Income (not our actual numbers) $2500 minus expenses (not our actual numbers) $1800 equals $700 remaining.
The point of a zero-based budget is to do exactly that – zero out each paycheck. Given the above example where there is $700 remaining, I will either put that $700 towards my baby step #1 emergency fund or I will put that $700 on my debt snowball smallest bill in baby step #2.
If you’ve never created a budget before, here’s a quick piece of advice. It’s not going to be perfect after the first budget. You’re going to realize you will want to tweak some things. Maybe my last day of the month budget is expense heavy, I might pay it two weeks early and put it on my 15th budget.
Check out my sample zero-based budget. You can find it on my "Free Stuff" page.
Stay the course. It will get better. At first you might spend an hour or two working on your budget, and by the time you get the hang of it, you might just spend a couple of minutes.