5 Tips to Get Started on a Zero Based Budget

by Ace on July 6, 2010

Do you fear budgets? Have you tried them in the past and failed? I’ve had my fair share of failed budgeting attempts, but I’ve finally found a system that works well for me. I’ve been using a zero-based budget for the past year and it provides the right amount of control and flexibility, while still being easy to maintain. Dave Ramsey is famous for advocating the zero based budget system. Here’s what he says about it, “Make sure you write it down. Give every dollar a name on paper. Spend your income on paper before you actually spend it.”

We’ll take a look at why zero based budgeting makes for a good budgeting system, and end with 5 tips that will help you start your zero based budget.

Requirements of a Good Budget

What makes a budget work? Or maybe a better question, where do budgeting systems fail? Here are 4 requirements that are necessary to a successful budgeting system.

Easy to Identify Problem Areas. If budgets don’t help us identify the areas in our life that we are spending too much then it has failed us.
Easy to Adjust. Once we identify the areas that need work, our budgets need to make it easy for us to make changes. This means that redistributing our proposed spending has to be simple and easy.
Flexible. Breaking a budget month after month can be a sign that there’s fundamental problems with the way we spend money. But, there also needs to be some room to breathe in our budgeting system. If we end up focusing too much on the details then we will set ourselves up to be stressed and overwhelmed by our budget.
Low Time Commitment. If it doesn’t meet this metric then it will certainly fail. We’ve seen how barriers can prevent us from doing what’s right, and this is no exception. If budgeting takes too long and too much effort then it won’t be too long before it’s collecting cobwebs.

How Zero-Based Budgeting Works

In a zero based budget you assign each dollar to a category. This could be saving, food, gas, entertainment etc. This is the process that Dave refers to as spending your income on paper before you actually spend it. By assigning a job to each dollar, you’re already making a decision what you can and can’t spend your money on. Here’s how zero base budgeting addresses each of the requirements above.

Easy to Identify Problem Areas. With a zero-based budgeting system, problem areas are categories that run out of money. If you’re 3/4 of the way through the month and you realize you’ve spent all your food money, then you have a problem.
Easy to Adjust. There are two ways can you can adjust with the zero based budget. You can either spend less money in that category. Or you can opt to budget more money for it the following month. Since you can only budget the available income that you have, you’re guaranteed to budget only what you make.
Flexible. You have the ability to change how much to allocate to each category. If you think that you’re starting to spend too much on entertainment, you can reduce your budget for it, or better yet tax yourself into saving more!
Low Time Commitment. Whether you meet this requirement or not depends on how you track your zero-based budget. I’m currently using You Need a Budget 3 to help me manage my budget, and I find that I’m spending less than an hour a month managing and adjusting my budget.

5 Tips to Get Started on a Zero Based Budget

Start tracking your income each month. True to the YNAB methodology, I use the income from the previous month. So when I make my budget for July, I base it on the money I earned in June. This means that while you’re making your budget you know exactly how much money you have to work with.
Make a list of all of your categories that you spend on. It’s important to take the Goldilocks approach to this. You want enough categories to be able to identify specific areas that are problematic (e.g. eating out at fast food joints too much), but not so specific that it gets overly complicated.
Allocate fixed spending. It’s easy to overlook the need to save each month for car insurance, or other things that require payments on an infrequent basis. But, the great thing about zero-based budgeting is that you can save for those expenses and let the money roll over from month to month. For example, if you have car insurance due every 6 months for $600, then you can allocate $100 each month in your zero-based budget system. This way when the payment is due you already have the money waiting and ready to go!
Assign the remainder of your income to the variable spending categories. Make reasonable estimations of how much you spend. Even if you’re completely wrong, taking the first step of starting a budget will at least get you going in the right direction.
Adjust as necessary. Don’t stress out about your budget being perfect, it’ll be clear after your first month or two the nature of your spending. Once you identify where you made mistakes in your initial guesses, you can adjust accordingly.