The most important thing that Keith and I have done to cash flow almost $300,000 of life and debt during the last 5 years is maintain an active zero-based budget.
"Active" means we actually use it and it's not a mere suggestion. If an adjustment needs to be made (and most months an adjustment needs to be made), we discuss it, make the adjustment and still remain at zero for the month.
"Zero-based" means we use only the money coming into our household in the budget. No savings is used unless it's an absolute emergency. And then it's only used after we have squeezed the budget for all non-critical money.
An example would be pulling from the kid's summer camp fund and leaving the emergency fund in place. The camp fund would then be replenished over time once the current money crisis was over. And absolutely no debt is used.
So why a zero-based budget?
We learned about it from Dave Ramsey and Crown Financial Ministries. Both teach people to live their financial lives as outlined in the Bible. A zero-based budget simply means to budget every single penny of the money coming into your household for a given month, before the month begins. No more...no less.
If there is "extra" money left after you have budgeted all of your expenses, you must find a home for it. If you don't, it will disappear quickly and you'll be wondering what happened to it. John Maxwell says "a budget is telling your money where to go instead of wondering where it went." A zero-based budget simply does that for every penny.
If there is not enough money in the budget to cover expenses, you must cut expenses until everything fits instead of paying for them with credit cards or savings.
Here is Dave Ramsey's simple definition: Income-Outgo=Zero. That's it.
What's The Purpose?
The purpose of a zero-based budget is to live within your monthly means without debt and without using your savings account as an extension of your checking account.
When you use a zero-based budget month end and month out, you will be amazed at how much financial traction you'll begin to have in your life.
We tell our financial coaching clients and Financial Peace University class members that going through a month without an active zero-based budget is like driving down a highway with your eyes closed. You have no idea where you are or where you're really going. You also can't adjust to what's happening around you because you can't see it.
Not doing a monthly zero-based budget is fiscally dangerous and will cripple you financially.
I know those are strong words, but Keith and I are living proof of what it looks like to live both with and without a zero-based budget. I encourage you to not just take my word, but try it for yourself.
To help you out, I've created a simple Excel zero-based budget. Before the beginning of each month, fill in your projected income and spend every penny of it in the expense section. You simply enter all forms of income for the month and all expenses for the month. Keep working your budget categories until you reach zero. If anything changes during the month (income goes up or down, new expenses, different expense amount, etc.) adjust the budget until you get back to zero.
Click on the button to download your copy.
Here are a few extra tips to help out:
Income: Total every source of income you are expecting for the month. Enter them into the spreadsheet. Feel free to change the names of the labels so they make sense to your life.
Savings: Enter the values of all of your current savings. This will not be used to manage your budget, but is a great way to see just how much money you have saved.
Expenses: Don't forget to include items you pay on a less than monthly basis. An example from our budget are property taxes. They are due in July, but we budget a small amount each month and no longer feel the pinch when the tax bill is due.
Also, consider transitioning auto-pay items from a credit card to a debit card in order to live without debt. Paying your card off each month is still debt since you are spending money you haven't earned yet!
If you receive commissions or any other type of irregular income, a zero-based budget is crucial! I'll walk you through how to handle irregular income in another article.
Give me 3 months with a zero-based budget and I will give you the beginnings of Christ-centered financial wellness.
Luke 14:28 says, "suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?"
Do you know what that means? Yep...a budget is biblical. Hmmm.
Would love to hear your thoughts.
Feel free to share your biggest concerns about budgeting. And if you are using a zero-based budget already, what value have you seen it bring to your life?
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Until next week...be well...be encouraged.