Financial Deep Dive: Zero Based Budgeting

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At the beginning of this month, I shared my May budget on the new spreadsheet that I made (get it here!) and glossed over the idea of using a 'zero-based budget,' which I promised to talk about more later in the month.  Namely what the heck it is and why it's the best way to budget for me.


What is a Zero Based Budget?

The concept of zero based budgeting is actually pretty simple - you take the income you make in a month (or however you want to budget - some do monthly, some every payday, any system is fine!) and write it at the top of the page.  Then you slowly subtract everything you need to spend money on before you hit the next pay day, all the way down until you hit zero dollars left to account for.  It doesn't mean that you spend everything, only that you're giving every dollar you make a job, and that includes saving for things like retirement, Christmas, and the new roof your house will need in 15 years.

It's a way of being intentional about what you spend and what you save, rather than wondering where your 'extra' money goes each month.  If you don't set it aside to save for bigger purchases, you'll just end up spending it on little things you don't need that really add up over time (makeup, candles and home decor, kitchen utensils, whatever your vice is) and then you'll constantly feel behind financially, or worse, go into debt.

What goes into the budget?

Start with the 'must haves.'  This includes fixed bills like mortgage payments, health insurance, utilities, etc., those things you need to spend each month to keep a roof over your head (and health insurance, because of course you need it.)  It also includes variable but necessary expenses like groceries and gas for the car.  The longer you work with a budget, the more clear these variable numbers become. Don't forget to factor in expenses that only come up every year or 6 months, like car registration and insurance.

Once you subtract the basic and necessary expenditures, you need to prioritize what else that money gets spent on.  If you're still in debt (any kind outside of a mortgage, such as credit cards, student loans, or car payments), that would be the next priority.  We don't have debt outside of our mortgage and I personally believe you have to be fully committed to getting rid of it.  Being debt free feels like getting a raise, and you finally get your money to work for you.  But more on debt in another post.  For now, suffice it to say that I would put any money after bills towards debt.

If you're debt free, then the next items you'd account for in your monthly budget would be the more 'fun' things, like eating out and other entertainment, clothing, makeup, things like that.  The amount you'd spend on these areas depends completely on your other long-term financial goals, meaning your savings and 'sinking funds.'  It's good to think about these long-term goals when you're budgeting for fun items, because it's easier to say no to a $16 martini when you know that $16 could go towards your vacation fund.  Sinking funds is just another term for a savings account.  Somewhere you sink money into every month so you aren't hit with a big bill all at once.  I do this for Christmas, vacations, and pet care, so I can save all year long for those things.

My Zero Based Budget

Here's what my June budget looks like at the moment, although the best way to budget is to constantly make tweaks and stay on top of finances, rather than just be passive and only check in at the end of the month, so I'm sure I'll make tweaks before June gets here.  You can click the pictures to make them bigger and see all the details.


For income, you can see my two paychecks.  I get paid on the 15th and the 30th.  I budget only using my income.  John makes about what I do in a year, but his is more sporadic because some months he gets way more overtime than others.  So I pay utilities and he pays the mortgage, which is why you don't see any sort of housing payment on my budget.  And when I say 'mortgage,' I mean the entire PITI payment (principal, interest, taxes, insurance.)  He manages what to do with the rest of his income.  He does have a car (paid off of course), so he has to pay for things like city stickers and gas, and he'll get himself things that are outside the general household grocery budget, like energy drinks (ew.)  The system works for us because I like to control every dollar I make, whereas he likes to send off money to tons of savings accounts (pensions, deferred comp, etc.) before he even gets his paycheck, so he doesn't have to think about it, and then he'll spend more on 'fun' stuff like beer and cigars.  All that to say, this is just my budget and income.

After income are my normal monthly expenses, including the $200 I budget each month for groceries and household goods for the two of us.  The other things listed are health insurance, security, electric, gas, cable/internet, bus pass, our cleaning lady, Netflix, and water/sewer.  If you're wondering what something is or why I don't have a line item for something, ask me in the comments.  No budgets are the same, so it's possible I just include it in another category, or don't spend on it at all.  After that is the section I leave for debt, but we don't have any.  I do keep one credit card open with a $12k limit, because I feel like I'd spend that and more if Hawkeye had an emergency so I keep the line item on there just in case I spend something on that card.

The last section is for savings and sinking funds.  Obviously my 401(k) comes out of my paycheck before I get it, but I'm still tracking it.  May is the first month I was able to start funding my 401(k) at this new job, which means I have 8 months to hit the $19,000 cap that the federal government allows you to put into your account each year, and I like to use this budget to ensure that I'll hit that.  I used a big chunk of money for the deck we had installed, so I'm just now going back to saving for my Roth IRA too, which is capped at $6,000 a year. 

As you can see, I have the other sinking funds labeled as to where I would like money to go and the things I anticipate having to pay for, but at the moment I'm saving everything for 'house money.'  In case you missed my 'I hate being a homeowner' meltdown on Instagram over the weekend, we got water in our basement through two vertical cracks in the foundation and had to rip out all the carpet and make a huge whole in the wall.  Thankfully, John's dad knows how to fix it for just a couple hundred in hydraulic concrete and drywall supplies, but we're going to have to level the floor and put in new (cheap) flooring, until we decide what else to do in the basement.  And that portion will probably be $2,000-$3,000.  Honestly, John is the only one who wants to own.  I'd have been happy to rent forever and let things like water seepage be someone else's problem.

My Zero Based Budget Template

If you're interested in my exact budget, you can get it on my Etsy shop.  It works for Excel and also Google Sheets.


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