Finally Frugal's zero-based budget approach. . . .

A commenter asked about the mechanics behind the zero-based budget, which has changed my life since I started using this system in February.

"Hi- could you explain a bit more about how to develop/follow a zero based budget? I don't quite understand! Thanks and I enjoy your blog!"

I learned about this type of budget from reading Dave Ramsey’s Total Money Makeover (TMM). According to Dave (we’re on a first name basis), the theory behind this type of budget is this:

"Every single dollar of your income should be allocated to some category on this form. When you’re done, your total income minus expenses should equal zero. If it doesn’t, then you need to adjust some categories (such as debt reduction, giving, or saving) so that it does equal zero. Use some common sense here, too. Do not leave things like clothes, car repairs, or home improvements off this list. If you don’t plan for these things, then you’re only setting yourself up for failure later."

I began keeping track of my expenditures in November of 2007. This was incredibly helpful to me---I finally had a clear picture of where my money was going each month! And it was surprising---I had no idea how much I was spending at places like Target and Banana Republic. Meanwhile, my credit card balances were continuing to grow.

After reading The Total Money Makeover, it finally dawned on me that my monthly expenditure budget (which I still use) was only the first step to gaining control over my finances. It was very well and good to know where my money was going, after it was gone--but that wasn't enough. The next step in reducing my expenditures was to actually tell my money where to go, before it went anywhere.

That’s where my simplified version of Dave’s rather complicated ‘Cash Flow' budget comes in. I created an Excel spreadsheet with three columns: Expenditures (mortgage, utilities, savings, etc); Estimated Income and Estimated Expenditures (where I estimated how much I would bring in as well as how much I would and should spend in certain areas); and Actual Income and Expenditures (to be updated throughout the month as pay and bills arrive).

A few days before the beginning of every month, I enter the amounts I think I’ll spend on my mortgage, utilities, groceries, and so on. My Excel document includes formulas in the ‘Remaining’ rows that show how much money I’ll have left after each expenditure. When I enter $1556 for my total mortgage payment, that is automatically deducted from my total Estimated Income for that month---my Excel formula does it for me. I simply go down the line of Estimated Expenditures and enter the guesstimate of how much I’ll spend.

Some are easy: for example, I know exactly how much I’ll spend on my mortgage, usually. Some are more difficult: my utilities vary from month to month. I logged onto my electric and gas accounts online and was able to view bills going back 13 months. This allowed me to estimate how much I would probably spend on my utilities for the month of May, based on last year and the fact that I’m trying to conserve energy. Others are more like limits. Under ‘fun money’, I don’t want to go over a certain amount (I’ve not once succeeded in this area, however). That’s usually the last row I fill in, after everything else---including money sent to savings and credit reduction---has been entered.

At the end, the number at the very bottom should be equal to zero. That means each and every dollar of your estimated income has been given a home. When you have an unexpected expense, you’ll need to go back to the budget and see where you can decrease another amount (usually fun money, unfortunately) so the new payment can be entered.

It’s helpful to have a couple of months of record keeping detailing your expenses---like my monthly expenditures spreadsheet---so you are familiar with regular expenses, including quarterly expenses like auto insurance, trash pickup, or water and sewer payments.

If you’re already a good record keeper, you can just go back to your online checking/savings account (or a check register---does anyone use these anymore?) and see where your money went for the last two or three months, whether it was a regular expenditure, or whether it can be averaged out over the year or quarter so you can start a savings account to cover it.

Note to my commenter and anyone else reading this: I'd be happy to send you an email 'vanilla' version of my Excel budget sheet, with the formulas included, so you can play around with it.