How to Create a Zero Based Budget

January 29, 2019

Zero based budgeting is a method of budgeting in which you subtract your expenses and savings from your income to equal 0. It gives every dollar you earn a purpose, rather than allowing more flexibility in whether some percentage of your dollars are spent or saved. This can be a useful method for those who are not sure where all of their money is going, or if they have important savings goals to meet, such as buying a house or saving for a child’s education.


The first step is to write down your monthly income. This will include paychecks, side hustles, child support, and any other cash you bring in. If you have an irregular income, a good rule is to base your budget on what a low earning month looks like for you.


Next, you will want to list what you will save and give monthly. Saving money is not a matter of what is left over after expenses, but what you find important to prioritize. It is a good principle in budgeting to “Pay yourself first.” You should focus on your financial goals and create a reasonable expectation of how fast you can save. You will likely have multiple goals you are saving towards, for example, saving for a down payment, emergency fund, remodeling project, a new car, retirement, your next vacation, or children’s education. List which goals you want to focus on for the next year and write down how much per month you will contribute to each goal.


The third step is to write down every monthly expense, starting with basic necessities like food, shelter, utilities, internet/phone, and transportation. Once you cover the essentials, continue listing the rest of your expenses. Every month will vary depending on your needs, so you will need to account for those by budgeting for different months.


The fourth step is to write down seasonal expenses—items like Christmas gifts, birthday gifts, anniversaries are set events which you can plan for. After that, you will write down all of the irregular expenses you can brainstorm. Car renewal fees, property taxes, and insurance premiums are big expenses that can be budgeted for by setting aside a smaller amount every month.


The last step is to subtract your income from your expenses to equal zero. If it does not balance out the first time, try adjusting the numbers until you get there. If you find that your expenses exceed your budget, now is the time to cut back on discretionary spending that may be eating up your money, such as buying coffee instead of brewing at home, cooking inexpensive meals at home instead of going out to eat, buying brand name instead of discount brands, etc. If you find you have extra money after you have allocated it all, pick somewhere to assign it to. The goal with zero based budgeting is to account for every dollar.


With the zero based budget finished, you will want to track your expenses during the month to see how your spending is aligning with your new budget. You will want to continue tracking throughout the year and beyond:  Budgeting is an important lifelong practice. Your budget is fluid and will change as your priorities do every year, so it is important to do check-ins every once in a while to see if your budget is meeting your needs.


TABER Asset Management is a fiduciary and investment advisory firm located in Des Moines, IA. We advise clients from across the U.S. in financial planning, investment advisory, and wealth management. Please email us at invest@taberasset.com or call us at 515-557-1860 to inquire more about our services.

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