Our first zero-based budget

by Karen on August 7, 2008

We’re trying a zero-based budget this month for the first time. In the past, we’ve tried setting arbitrary limits on our spending (which didn’t really work). Other than that, we didn’t really track our spending beyond trying not to buy unnecessary things.

That philosophy has kept us from blowing our money, but we haven’t tracked our spending in a measurable way or designated a certain amount to a savings account until now.

A zero-based budget is a plan for your money that accounts for every single dollar of your income. After budgeting for fixed expenses and assigning limits for other expenditures like groceries and entertainment, you also assign a purpose to “extra” money by budgeting it toward savings, investing, or debt repayment.

I like the idea of a zero-based budget because it forces us to do something with the little bit of “extra” money we have after covering expenses and paying down debt. In the past, we’ve kept all of our money in our checking account. Anything we didn’t spend at the end of the month stayed in the checking account where it collected almost no interest. We were more likely to spend it – if not that month, then the next month or the month after that.

Our new plan is to keep only a cushion amount in our checking account to avoid catastrophe in the event of a spending mistake. We’ve cleared the rest of our money into savings. To avoid spending more than we make, we’re considering the cushion amount to be “zero.”

For the first time, we’re tracking exactly how much of our monthly income is left at the end of the month (if any) and putting it toward savings or debt (in ADDITION to the money we’ve already budgeted for savings and debt). If there’s nothing left or we spend more than our income, we’ll adjust our spending habits to ensure that we’re not spending more than we’re making.

I’m looking forward to having a solid number for our monthly expenses. It will give us more control over our spending and saving habits and help us determine how much we need for an emergency fund.

Rather than setting our budget in stone or setting arbitrary spending limits, we’re creating a flexible budget by tracking our expenses with Mint. New expenses spring up every month and some months our income may be higher than others, so our budget will be different each month.

We’ll sit down at the end of every month and set the next months’ budget based on what we spent last month, what we need to spend this month, and what we expect to make. Every dollar of income will be assigned somewhere. We’re challenging ourselves to spend below the budgeted amount where we can so we’ll have money left over at the end of the month.

We set our first zero-based budget at the end of last month, and we’re on track so far. More updates will follow as I’m sure the closer we get to the end of the month the harder it will become to stay within our budget.

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