Now that you have taken the first step and decided to start budgeting, let’s talk about creation of it. When trying to set up a budget, you need to think of how to organize it the easiest way for you to know where all your dollars are going and how they are working for you. There are several different ways to set up your budget with the most common methods being:
This method is percentage based off your income. You take 50% of your monthly income and use it towards your needs (rent, utilities, groceries, etc.), then 30% of your income goes to your wants (eating out, spending money & entertainment), and the remaining 20% goes into savings. This method does not give any room in your budget to put into any investing (if you are at this baby step), and does not account for any debt you may have.
60% Solution Method
This method seems simple enough, 60% of your income is allotted for all of your needs and wants, with the last 40% going into your savings. That last 40% is categorized 4 different ways in your savings: 10% goes into retirement, 10% long-term savings, 10% short-term savings, and lastly 10% into “fun”. In this method we can see that saving for retirement is allocated for, but again, if you are in baby step 2, nothing is earmarked to put towards the debt you are trying to get out of by creating a budget.
Reverse Budgeting Method
Reverse budgeting is all in its name. Normally with budgeting methods, you start with necessities and move onto savings from there. In this method you start with your savings and investing first, then move onto your necessities like housing, food, etc. This method gets kudos for putting such an emphasis on savings and investing, but this could put you in a very bad position if you are living paycheck to paycheck and counting on every dollar to be working the best way for you.
Zero-Based Budget Method
This method is the preferred budgeting method by not only Dave Ramsey and his team, but also the team with Whitaker-Myers Wealth Managers. By using a Zero-Based Budget, you are putting every dollar to work for you by giving it a designated role on how to be used and spent.
I understand, having the word “zero” in the name of your budget seems a little counterproductive. But contrary to that belief, it can actually help you SAVE money in your budget.
For a Zero-Based Budget, we suggest using EveryDollar that Dave Ramsey’s team created to keep track of your monthly income and expenses. It’s a simple, user-friendly, web-based app that you can also download to your phone for easy access to your budget while you’re out and about.
Since this is the method we prefer, we are going to focus on how a Zero-Based Budget can actually go to work for you.
So, what is a Zero-Based Budget?
Let’s break it down for you.
In simplest form, a zero-based budget is when you take your monthly income, and subtract all your outgoing expenses (this includes the dollars being put away for savings or paying off debt too!) from the monthly income total until the base line is zero.
*Please Note* your budget will hit zero, NOT your bank account. You should always have your emergency fund set up and in your account.
Let’s walk through creating a Zero-Based Budget
Start with your monthly income. If you have a spouse, make sure to include their income also. And don’t forget any side hustles, child support, etc. – anything that is income coming in to you on a monthly basis.
List your monthly expenses until your budget line hits zero. Dave Ramsey’s team suggest listing your expenses out in order as below.
As Dave Ramsey has said, “Outrageous generosity is a wonderful thing and is changing you as a person”. They suggest starting with giving as your first budget line so you can make this a priority. They suggest giving 10% of your income.
If you are in Baby Step 1, this is where you are building up that $1,000 emergency fund. If you are in Baby Step 3, this is the 3–6-month emergency fund. And lastly, if you are in Baby Step 7, this is where you are putting money aside to continue building wealth.
These are your absolute necessities: food, utilities, shelter and transportation. These are the things you need to live on from day to day to take care of yourself, and your family.
These are the items that come second in regards of needs. These items would include, insurance, child care, and debts. Yes, this is where Baby Step 2 is focused on at getting paid off. Got a sinking fund, this could also be where you put these expenses.
This area is considered the “fun” budget line. Think of this area as your dining out, shopping, and money to play with category. FYI – this is more than likely the area will you cut back to if you are trying to find money in your budget.
This budget line could change from month to month. This is where you put month specific items – think holidays, birthdays, events, or quarterly payments.
Lastly, don’t forget to give yourself some wiggle room. This budget line is to help cover expenses that pop up and you need somewhere for them to go.
NO, this is NOT your emergency fund. If you have car problems and need repairs, that should come out of your emergency fund not the miscellaneous budget line.
What if I have an irregular monthly income?
Having an irregular income can happen for several reasons. You have side hustle(s) that is dependent on outside purchases, or work you get. Or you are hourly or commission-based pay. Know that you can STILL DO A ZERO-BASED BUDGET!
To do this, it may be helpful to have a few past bank statements to review. Look at several previous months income and choose the lowest amount received. This becomes your starting line for your monthly income. If you notice you have started to make more income throughout the month, you can go in and adjust your budget to account for this increase.
Remember, “A Budget is just a plan”
You need to stay consistent with your plan by tracking all of your expenses. I know it may feel tedious at first, but the more you do it, the more natural and second hand it will come. The better your track your expenses, the more information you have to better help you plan for next month’s budget.
Don’t feel like a budget is holding you back or keeping you from using your money the way you want to. By doing a budget, YOU are the one in control of how your money is being used!
If you need help with your monthly budget or just need general financial help, our financial coaching service may be the right option for you. You can learn more here.
BUDGETING BASICS - BUDGET TYPES & ZERO-BASED BUDGET
February 27, 2022
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