Do you know how to make a zero based budget?
The first rule of personal finance has always been creating a budget. While some people don’t use any budget, others feel they’ve got their budgeting system stored in their head. They are satisfied to know they have a ‘good idea’ of how they spend their money.
It would be nice if we only had one or two financial matters to concern ourselves with each month but unless you are a teenage student with a part-time job, there will be multiple factors influencing your finances. The only tried and true way for developing a successful and useful budget is to commit it to paper.
Having a household budget allows you to match and keep track of your incoming money with your outgoing money. Knowing where your money goes each month is the best way to take control of your family finances, save for the future and prevent or get out of debt.
Table of Contents
Table of Contents
Why You Need a Written Budget
A budget is more than a list of numbers. It should be an interactive tool you use faithfully to determine your every money move. A budget spreadsheet is very simple to develop but in order for it to be effective, you must supply it with the right information. It can be easy to overlook certain aspects of your finances so if you are not confident you can map out a proper budget, there are many budgeting worksheets available that provide popular categories of expenses you may forget. By using a template version of a budget, you can customize the information to meet your needs.
By putting all of your financial data on paper, you actually get a true visual picture of the facts of your finances. For some people who are putting the data down for the first time, they actually experience shock at just how much they are spending and how much money they don’t really have.
A written budget is also an essential part of family finances. Even if just one spouse/partner controls the cash flow each month, everyone in the family old enough to tackle family finances also needs to take an active participation in family budgeting. Without a proper paper or electronic budget spreadsheet, it will become impossible to express how the finances work.
Here’s how to Create a Household Budget:
Keep Track of Money for 3 Months
Before you can accurately set up a household budget, you need to have a good understanding of what you’re spending your money on. For two to three months, keep a notebook and jot down everything you spend money on from bill paying to entertainment to the pack of gum at the corner store. Be sure to jot down all sources of income for this time period, including pay checks and any other sources of incoming money. This close look at your finances might change the way you think about debt.
There are many ways to keep track of your income and spending. You can start with something as basic as a pen and paper, or a simple budget spreadsheet on Excel of Google Docs.
You can also choose to use more advanced tools including desktop or online money management programs such as Personal Capital, Quicken, or Mint.com.
Note: Our favorite FREE personal finance app is Personal Capital, which allows you to track your spending, income, expenses, and investments in a free, easy to use platform.
Organize Your Expenses
Once your tracking period has ended, go through your notebook and create a list of fixed expenses on one page and a list of variable expenses on another page. Your fixed expenses are payments that are the same each month, and generally include your rent or mortgage, taxes, car payment, and loan payments.
Your variable expenses are those which fluctuate from month to month, and may include your car insurance, food, gas, medical, utilities, entertainment, children-related expenses, emergencies, and credit card payments.
You can make many of your variable expenses a fixed expense if you pay the same each year. For example, if you have quarterly expenses, you can take the total paid annually and divide by 12 months to figure out how much it costs you on a monthly basis. Doing this for all expenses possible will help you budget more accurately.
Determine Your Income
Take a look at your notebook for all sources of incoming money. Most people have fixed income in the form of a salary, but if your income is variable, you’ll need to take the average income for each month as accurately as you can.
Start Matching Income with Expenses
Look at the total of your fixed expenses list and compare it to your total monthly income. If your income isn’t enough to cover the list of fixed expenses, you’ve already got major issues to worry about! If you’re in that situation, you’ll need to increase your income or begin decreasing your expenses.
If your income is more than your fixed expenses, then make sure you have enough coming in to pay for everything on your variable expense list, too. If you don’t, you’ll have to decrease expenses or increase income (by getting a second job or finding a higher paying job) until it works out.
Build an Emergency Fund
The hardest part of a household budget is accounting for emergencies and unexpected financial hardships. The best way to avoid problems that arise from a decrease in income or an increase of expenses is to have an emergency fund available to pay for them when they occur – without having to dip into the money you normally use to pay your regular expenses. Try to build an emergency fund by deposited the same amount each month, as part of your “fixed expenses” – then when you have an unexpected expense, you can use your emergency fund and keep paying your bills with your income.
If you just don’t have any room to set money aside for an emergency fund (your income is exactly the amount you need to pay your bills); you can use an income tax refund or any other source of unexpected income (gifts) to start an emergency fund.
It takes work and a little practice, but before you know it, you will have a working budget which will make managing your money easier than ever.
Committing to Your Budget is Essential
It is not enough to fill in the blanks of a budget worksheet once, never to return. A budget should be an interactive and regular part of your week. You should continue to update and rework the numbers of your budget and eventually it will become habit for you to commit to progressive budgeting strategies.
When income changes, when bills increase or decrease, or when cuts need to be made to save more money, a budget that is kept up-to-date will help to accommodate these changes with ease. It will prevent you from having to start over from scratch time and time again. If a major lifestyle change occurs such as job loss or medical issues, a current budget will be able to show at a glance how to plan for the changes necessary.
Numbers in your head will never work. You need to first track where you are spending your income and then get to work on committing to a physical budget. It truly is the only way to stay in the know on all of your financial matters. Guesswork does not make anyone financially savvy or financially stable so it is in your best interest to sit down with your money matters and construct the start of your budgeting life today.
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Pat S. says
I’ve had great experience with USAA’s money manager. I used to use Mint, but find USAA’s budgeting program much easier to use and update.