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As part of my blogging goals for 2012-2013, one of the ongoing projects I’ve been working on since Thanksgiving has been writing a book called, 31 Days to a Financial Revolution – Automate Your Finances To Achieve Financial Success. As I mentioned several days ago, the book details a series of 31 approachable steps over a one month period that people can take to optimize their finances. Along each step of the way, 2-minute automation action items are implemented to increase the likelihood of the financial planning steps being followed going forward.
At first, my goal was to just write a short 20-30 page eBook on one specific topic. However, when I started looking at all of the material I had already covered on my site (now at 800+ posts total so far), I realized it was complete enough to tie together in to the form of a book. However, out of all the posts on my site, I realized there is one topic that had not been covered in a step-by-step manner (only piecemeal thus far) – creating the type of budget I use each month for my personal finances, a zero based budget.
The purpose of this post will be to correct this annoying little discrepancy and cover an important step that I think should be taken in personal finance – creating a zero-based budget to manage your monthly finances!
Creating an Automated Zero-Based Budget to Strategically Manage Your Month-to-Month Finances
Why a Zero-Based Budget?
As you can tell, this is clearly different than a normal budget, which dictates that you leave money in your primary spending account until the end of the pay period (at which time you then transfer the money to help achieve your financial goals).
While the idea behind a normal budget is sound, I have found that in practice, it simply does not hold up. This is due to the fact that the unforeseen struggles of daily life get in the way, and the money that you have reserved in good faith to meet your financial goals (savings especially) at the end of the month gets spent prematurely.
How to Create Your Zero-Based Budget
Why do I look forward to doing this? Because each time I do it means that I am moving towards strategically managing my money and ultimately, my financial goals.
To create a zero-based budget for yourself, simply follow the steps outlined below:
- For your zero-based budget, I recommend creating a new Google Docs Spreadsheet (www.docs.google.com). I prefer this to traditional spreadsheets because this way, your zero-based budget will be stored in the “cloud” and will be accessible from anywhere in the world and on any computer.
- Next, in the first row of the spreadsheet (starting with the second column), label columns with the dates of each of your pay periods for the next year.
- Then, in the first column of the spreadsheet, label each row according to ALL of your monthly financial commitments. The key here is to be very complete! They don’t call it a zero-based budget for nothing; the goal is to get your leftover money to zero after all! Make sure to include all of your normal monthly spending for energy, water/sewer/trash, TV/Internet, insurance (all types), Netflix, estimated tax savings, partying, homeowner’s association fees, student loans, credit cards, your mortgage, groceries/food, gas, child care, gym memberships, dog food, magazine subscriptions – everything. To make sure you haven’t missed any of your monthly spending, I recommend tracking every bit of your spending for 3 months to determine your patterns. In addition, you’ll also want to include any savings that you have for building an emergency fund, charity contributions, and life values/dreams.
- Lastly, you’ll need to add additional rows for other important financial commitments, such as savings for future vacations and long-term retirement. To complete the budget list, I also like to include something called “comfort buffer” money. This is essentially the minimum amount of money that a person feels comfortable carrying in his or her checking account while still being able to sleep soundly at night. For me, this is around $600, but will vary for each person. For example, my girlfriend is comfortable having only $100 in her account. I would personally recommend keeping a minimum of $100-$200 in your spending account so that you don’t have to monitor it as closely, but to each their own!
- Once you’ve listed all of your budget items, I recommend to “freeze” the 1st row and 1st column of the spreadsheet so that if you scroll down the page, you’ll still be able to see the date of each budget period and all of the budget items.
- Next, at the bottom of each column/budget period, sum the column to calculate the total money needed to meet your financial commitments. This total is important to monitor to make sure that you don’t financially overextend yourself by comparing it with your take-home pay each period. If the total is greater than your income, you will need to cut back. However, if it is less, you can scale up your debt payoff or retirement savings goals in accordance with the priority rules set forth the Account Hierarchy.
Monitoring Your Zero-Based Budget Each Pay Period
In my experience, I’ve found that budget items always fall in to one of two categories – things that are automatically paid/deducted/transferred out of your spending account and ones that you need to manually execute.
To help distinguish between the two, I like to color code the cells accordingly, using yellow for items that are executed automatically and green for items that I have to manually initiate each pay period. After an automatic transfer has been initiated for one of the automated items, I simply change the appropriate cell to yellow to indicate that it has occurred. For the manual items, immediately after I am paid in that period, I initiate a transfer from my checking account to the appropriate strategic location. After that, I mark the appropriate cell green and then insert a comment with the date that the transfer was initiated.
For items such as gas and groceries that you purchase while running errands (i.e. physically when you are out and about), you can just leave the money earmarked for that in your spending account since you will naturally spend money for those things out of necessity.
And just like that, you’ve now set up a great zero-based budgeting tool that will serve as the new cornerstone for managing your finances each month. In order to make sure the process continues without hitches, you’ll want to set up the following automation item.
2-Minute Automation Action Item – Once you have set up your zero-based budget, place an automatic, recurring reminder on your Outlook or Gmail calendar to review and update your zero-based budget directly after you get paid each pay period, taking special care to ensure that you execute the manual items you identified above.
How about you all? Do you use a budget to manage your monthly finances? Have you ever tried a zero-based budget? If so, how did it work out for you!?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/nourishingcook/5676133931/sizes/l/in/photostream/