A new month is approaching and I thought this would be the best time to walk through how we set up a zero-based budget!
I created a printable budget worksheet that you can download and print or follow the layout to write it out in a notebook or setup a worksheet on the computer. I prefer printing or physically writing out our budget so that I have easy access to it!
If you haven’t already received the printable, you can download yours by filling out the two boxes here and hitting subscribe! By doing so you’ll also start getting budget tips and topics directly to your inbox every month. You have my word – I will never SPAM you or share your info!
Once you have your download you can use this post to help walk through setting it up.
I will also be sharing a walk through on IG @thesedaysofgrace_. If you miss it, send me a DM and I can direct you where to find it!
Whether you have a fixed income or your paycheck varies from week to week, you can use this method to account for all of your income and expenses.
What is meant by “zero-based budget”?
If you have never used a zero-based budget before, think of it as telling every dollar you have where it will go for the month. When you total up your budget categories, your total income minus total expenses should equal zero.
It doesn’t always mean every dollar you have is spent. It means that you are giving each dollar of income a job to do or a place to go.
This method of budgeting also includes extra debt payments and money allocated to savings. Every dollar of income is accounted for and allocated to either an expense, a debt or a savings account.
How do I use the printable worksheet to set up a zero-based budget?
Print your worksheet or set up a blank page or spreadsheet to match the layout of the budget. I included some basic instructions with the download, but I think it would be helpful to walk through each category a little bit more.
Income
This can either be an exact amount or an estimate. You can use your monthly income, or set up a budget for each paycheck you expect to receive.
This is going to be the amount you have to allocate over all expenses, debt payments and savings accounts. Include income from all sources for your household.
How should I budget if my income varies?
If you work on commission, tips or if your hours vary from week to week it can be hard to predict what amount you should use for income for the month.
Here are some different options you can use to make the most accurate budget:
- Look back at past months’ income and calculate the average.
- Use your base salary if you have one.
- Create a new budget each time you get paid, rather than for the whole month. Include the bills that are due that week and a portion of any other spending categories.
If you are estimating, I would suggest using the lowest amount you could expect to earn per month. It will be easier to allocate any extra income, but harder to try to cover overestimated expenses.
Something that has helped us tremendously with this budgeting method has been getting a month ahead on our bills. I know exactly how much income we have to work with at the beginning of each month. If you are paid once a month, you are already in a good spot to make this work. If not, maybe one of your savings goals could be to save up a month’s worth of expenses to get ahead on your bills.
Bills
This is where you will list all of your fixed expenses – rent, mortgage, cell phone, insurance, etc. I also include our utilities in this category, even though the amount fluctuates, and use an estimate.
If you have credit cards and loan payments, list the minimum due here.
It also helps to make a note of the due date for each bill. When the bill is paid, I fill in the Actual column, which helps me to keep track of everything that has been paid.
Spending Categories
This is where you will track variable expense categories, such as groceries, eating-out, gas, shopping, etc.
For some, it helps to use cash for these categories, as it helps to keep you from overspending. You set a budget amount and withdraw that amount from your bank to allocate to a “cash envelope” for that category.
For others, using a debit card is easier. To keep from overspending in these categories, an expense tracker is a useful tool. This can be as simple as a spreadsheet on your computer or a page in your notebook. Every time you spend, write down where you shopped and what you spent. Then be sure to categorize it – I use highlighters with a color for each of our spending categories.
How do you determine your budget for spending accounts?
A good way to determine where to begin setting spending limits is to look back on your past spending habits.
If you typically use debit or credit cards, this will be easy. Login to your bank statements and either print or write down your expenses for previous months. 2 or 3 months back should give you an idea of your average spending. Of course things are a bit different now when it comes to spending, it may be more useful to skip back to February to start.
Categorize your spending. This will also help you to determine what categories to include in your budgeting.
And be sure to set realistic limits. If you’ve spent an average of $1000 on food in the past three months, setting yourself a budget of $400 may be setting yourself up for failure. The exception, of course, is if your income has been drastically affected this month. In which case, setting extreme limits may no longer be just an option but a necessity.
If you typically use cash, the best way is to estimate and then track your expenses going forward. You can then adjust your budget limits for next month’s budget.
Sinking Funds
Not everyone uses sinking funds, but it can be a great way to avoid having large expenses creep up all at once. Think of sinking funds as mini savings accounts for future spending.
A good example would be holiday spending. If you know that you will spend $600 on Christmas gifts and activities, try to budget to set aside $50 per month, either in a separate account or in cash, specifically for Christmas. This breaks up the large expense so that you won’t have to sacrifice other spending or risk having to incur debt to get through the holidays.
Some common sinking fund categories that might be helpful are:
- Vacations
- Holidays and birthdays
- Tax payments
- Vehicle registrations or licenses
- Insurance premiums if paid in full
- Medical expenses
- Veterinary expenses
Debt Snowball
This is where we start to see the meaning of the “zero-based” budget. Once we have accounted for all of our bills and other variable expenses, it is important to give any leftover money a place to go.
This category is where you can track any extra payments you plan to make toward debts.
It is very important to set financial goals when setting up your budget, whether it is to payoff debt, save money or just be sure to stay on top of your bills. If your goal is to payoff a credit card or loan, then, if your income allows, this is where you can allocate some of your income to make an extra payment toward one of your debts.
The “debt snowball” is the term used for lumping additional debt payments to one specific debt until it is paid off, then adding the minimum payment from the paid off debt toward your next debt. Essentially growing your extra debt payments like rolling a snowball in the snow to make it bigger.
Savings
If growing your savings is your goal, this is where you will tell your remaining income where to go. Leftover money should be allocated to savings accounts, investments, retirement, college savings, etc.
You can save while paying off debt as well, you’ll just determine how much of your income you wish to allocate to each goal.
If you are working on getting a month ahead on your bills or building an emergency fund, this is a great place to keep track of how much money you can set aside for those goals.
The zero-based method
As you work your way through each category you will notice there are total columns. Think of the worksheet as one continuous math equation (wait, don’t run away yet!).
Starting with your income total. After filling in all of your monthly bills, subtotal the category. Then, subtract that amount from your total income to get the balance left.
As you work through each category, you’ll carry over the balance from the previous to know exactly how much you still have to allocate.
By time you work through the righthand columns, your total should eventually reach zero. Depending on your financial goals, this may occur after sinking funds, it may last through to savings or you may just have enough to cover your bills.
If this is your first time setting up a budget, it should give you a clear picture of where you can try to make adjustments to stretch your income to achieve your goals.
Regardless of where you are in your budget journey, work through the budget worksheet until your balance equals zero, and every dollar coming in has a place to go.
May is just around the corner so it is the perfect time to get started on setting up your new budget.
Here are a few FAQs to help you along, but if you still have any underlying questions feel free to reach out! I am always happy to help and I’m sure there are ways that I can improve my explanation of this subject!
What if my expenses are more than my income?
If you make it through your fixed and variable expenses and are left in the negative you are living above your means. This is very challenging when you have very little room in your income. Believe me, we have been there.
But it is important to try to avoid incurring more debt just to live day-to-day.
The best advice I can give you (in short form) is to look for ways to reduce your bills first. I talked in this blog post about how you can try to see if companies will work with you to lower your payments and free up some space in your budget.
Apps like TrueBill can do this for you. You simply link your accounts to the app and they will do the work to find ways to save you money on your bills.
They find savings for you and charge a percentage of that amount. You can learn more about TrueBill and how it can help you by clicking here.
Once you have looked for ways to reduce expenses you can look for ways to earn more. I know now is not the best time to look for a side income, but this post may give you some ideas that could work now.
Should I allocate leftover income to debt payments or savings?
This is something that is based solely on your own personal financial goals. I can tell you what I would do first as a suggestion, but just a quick disclaimer: I am not a financial expert.
If you do not yet have an emergency fund, a savings account with enough money to cover 1-6 months of bills, I would start here.
We saw over the past couple of months how quickly financial situations can change. Unfortunately, many people have been left with no income and nothing saved to pay their bills.
A common budgeting method suggests keeping just $1000 in your savings. However, if you were to lose your job, like so many have recently, $1000 would likely not take you very far.
I suggest saving 3-6 months worth of bills (including groceries and gas) in your emergency fund. Or, at the very least, one month’s expenses. This is what I would prioritize.
Once you have an emergency fund, set your personal financial goals and let that be your guide.
Keep in mind, any credit card debt is likely incurring 15%+ of interest where a basic saving account is likely earning you under 1% of interest. Prioritizing debt repayment will save you money in the long run. But if you hope to make a large purchase or pay for school in the near future, allocating money to those savings accounts will prevent you from incurring larger amounts of debt.
If your income allows, do a little of both.