Think about how much money you make. Think about how much money you have made as a working adult. Now consider how much of all that money you still have. Probably not as much as you would like. A budget can help you take control of your income but of course that means actually having to do a budget.
The budget has gotten a bad rap. The word conjures up ideas of bureaucracy and constraint. Not to mention the daunting task of actually putting one together. I will show you how to create a budget and show you that it can actually be freeing.
The Zero-Based Budget
As you may have guessed from the name, a zero-based budget means that when you get to the bottom of the page you have $0 left over. I know that sounds difficult but I promise it seems more intimidating than it really is. Let’s break down the budget into three simple categories:
- Fixed Expenses
- Variable Expenses
This one is pretty straight forward. When dealing with a budget you are only concerned with your net income. Don’t worry about your before-tax dollars that are taken out of your paycheck. You only have the amount of money you actually bring home to work with, so let’s start with that amount.
If you get paid more than once a month then you split your month up into the different pay periods. For instance, I get paid twice a month so I have one column for the first paycheck and a second column for the second paycheck. For now though let’s keep things simple and assume you are paid once a month.
At the top of the page you put your income. For our example let’s use nice, round numbers so imagine you bring home $2,000 a month. Income is now done and just like that, you are already done with 1/3 of your budget; simple right?
These are your set amount costs such as rent/mortgage and insurances. These costs are the same from month to month. Certain bills, like your phone, may not be fixed but based on usage, however I include all bills and utilities in my fixed costs section because you can usually account for how much they will be.
So to continue our example, list all of your fixed costs and subtract them from your income. If your rent is $500, you now have $1,500 left to spend for the month. And you continue down the page putting your expenses minus your remaining income. For our example and to continue with simple math let’s say the rest of your fixed bills equal $500 too so we are left with $1,000.
These are categories such as groceries, gas, and entertainment. These expenses are variable in name only because in a zero-based budget we are going to set exactly what we are going to spend in each category. For your first budget this will be mostly guessing. The good news is your budget is not set in stone. You are not going to get these all of these categories exactly right every time and that is okay because we can adjust for that when it happens.
What you must remember is the $0 at the bottom of the page. If you budget $400 for groceries but end up spending $450 then you must cut another category by that $50. This way you never overspend your income. Your budget is a living, breathing work-in-progress. Don’t be afraid to change it mid-month.
That’s really all there is to it. Write down how much money you have coming in. Detail exactly how much money you have going out and on what. When you give every dollar a name before the month begins you start telling your money where to go instead of wondering where it went.
I know following along with the example in text might be difficult so let’s look at our example budget.
If you are not doing a monthly budget, I guarantee you are spending more in some of these categories than you think. Groceries and Restaurants are huge budget busters and by planning on how much to spend on them you will be able to free up your most valuable resource, your money.
Now this is as basic as it gets but it is a great starting point. I plan to do a series of posts focusing on taking control of your income. We’ll look at a budget in more detail and discuss prioritizing it for a purpose. When you have a goal for your money, like paying off debt or saving up an emergency fund, a budget is your game plan It is incredible how spending your money on paper first allows you to achieve your goals quicker and easier. But you can’t do it if you aren’t paying attention.
It really is empowering to take control of your income once you know how to create a budget.
Do you follow a written, monthly budget?