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What Everybody Ought to Know About Zero-Based Budgeting

What Everybody Ought to Know About Zero-Based Budgeting

Photo by amathal at deviantART

Photo by amathal at deviantART

The topic of debt reduction is multifaceted, but when I think back to what was the most basic concept that served as a foundation for financial health, it has to be the household budget. There are many rules for budgets, and if I go into all of them in this post it will get confusing. So for today, I just want to address the concept of the Zero-Based Budget.

The Zero-Based Budget
In a nutshell, the zero-based budget is a budget that begins with how much money is coming in, and works backwards, paying bills by priority, until we reach zero.

The zero-based budget ensures that every single dollar that comes into the household is put to its best use. Because budgets are highly individualized, I’m going to give you an overly simplistic example to illustrate the basic concept, and then you can tweak it to fit your own household.

Say the Right-Clicks are paid twice a month, $1000 on the first of the month, and $1000 on the 15th of the month. What I am going to do is figure out all of the things we are going to need to spend money on between the time we receive this first check for $1000, and the next one that is due on the 15th of the month. This will be our household budget, December 1-15.

Let’s say our semi-fixed “need” expenses are as follows:

Expenses Date Due Amount Due
Car Insurance December 5 $100
Gas Bill December 10 $40
Electric Bill December 5 $150
Groceries (Enough for 2 weeks) $200
Mortgage* Due January 1* $400
Total $890

So, after paying all of our required expenses, we’ve got a total of $890, which leaves us $110 to play around with. We can use this money for a variety of things, such as pocket money, savings, gifts, or what have you. This is where your own priorities come in. Do you want to put $110 towards your beginner emergency fund (yes!)? Or will you need some of that for Christmas? (Probably.) What about putting extra money on debt (aka the “debt snowball,” which I will talk about later.) How you make these choices is completely up to you, but as you pay more and more attention to where your money is going, you might just find that you’re making better choices for yourself and your family.

*In this hypothetical, as is probably the case in most real budgets, the mortgage is due at the first of the month, but the amount of the mortgage is large enough that you have to allow for it in both budgets. Here, we’re taking out one half to save for the payment later in the month.

Comments (12)

  1. Nov 25, 2008

    what i wouldn’t give for a $400.00/mo mortgage 😉

  2. Nov 25, 2008

    Well, it would be a $800/month mortgage. But yeah. Not a very realistic budget there. I didn’t want to use real numbers, because if outsiders are exposed to the price of California real estate, they might throw up or have a heart attack. And then die. 🙂

    But hopefully it illustrates the point.

  3. Nov 25, 2008

    Interesting approach. But doesn’t it contradict the time-honored strategy “pay yourself first”? (Not that this strategy is necessarily good just because it is so time-honored.) At what level do you include savings though?

  4. Nov 25, 2008

    haha, $800 would be great too. LOL. probably better to use pretend #’s though, wouldn’t want the readers going belly-up 😉

  5. Nov 25, 2008

    @vilkri, it doesn’t necessarily, though it does look that way in the example. This is not a comprehensive budget, and ideally you would have enough left over to put 15% into retirement, plus have emergency savings, etc. etc. This is part of what I meant when I said it’s an overwhelming topic! So many things to consider–but what I ultimately decided is that this is just the real basics, the kind of stuff people should be taught in school, but aren’t–and a lot of people out there cannot even make their basic necessities, much less pay themselves first. So I’m kind of aiming towards them, I suppose.

    This kind of thing comes up when you deal with Suze Orman people v. Dave Ramsey people–Suze Orman is all about saving for retirement, maintaining your credit score, which is great. But I’m more of a major financial fuckup in recovery, and so I’m aiming my posts towards people like me, which involves a more radical approach to debt recovery than Suze Orman ever really deals with, from what I know of her.

    But I do want to have this space be a possible place for this kind of discussion. It’s in all of our best interest to discuss the pros and cons of different approaches!

    PS–welcome!

  6. Nov 25, 2008

    Thanks for posting the article, was certainly a great read!

  7. KerrySS
    Nov 25, 2008

    You’re not going to start wearing ugly jackets like Suze Orman, are you? And the eyeliner done with a Sharpie pen…you’re going to just say no to that, right?

  8. Nov 25, 2008

    @kerrySS, LOL! Uh, noh. I’m not a big fan of Suze, actually. And she definitely needs some help with her wardrobe. You’d think she could hire a stylist with all that money coming in!

  9. kecia
    Nov 26, 2008

    I consider myself a “smart” person, with a Master’s, etc., but I am so dumb when it comes to finances because I have chosen to be that way. You know, head in the sand and all. So I appreciate the really basic approach you have going on here.

  10. Nov 26, 2008

    @kecia, exactly! I ran up my credit cards while I was getting a PhD. Because I never wanted to face money head on, and I never had any really clear, simple training. I think that basic personal finance concepts skipped a generation or two or something, maybe it was taught at some point in school, but I never got it.

  11. KerrySS
    Nov 26, 2008

    In my experience, there is NO connection between intelligence and financial management skills. I know a lot of very smart people who have been through this.

    I used to be in HR for an employer that ran credit checks on every incoming employee (a horrible practice, but I was not at that time in a position to stop them). You would be AMAZED how many people have gotten themselves into trouble…at all income levels and backgrounds….and this was back in the mid-90s, when we weren’t, like, on the brink of another Great Depression.

    One of the things that keeps people from getting help until they’re really in trouble is shame. That’s too bad, because most everyone I know has gotten in over their head at some point or another.

  12. Nov 26, 2008

    @KerrySS, yeah, it’s one of those things people don’t like to talk about. It makes them feel shame, and that tends to compound it, unfortunately. I think this is especially true for people who are successful and consider themselves smart.

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