Zero Based budget

A zero based budget is a budget that starts with zero and ends with zero. Most grant budgets for institutions are zero based, because you are generally expected to have zero dollars of the grant left at the end of the grant period.

In personal budgets, it means you start the month with zero and you end the month with zero. You spend every dollar of that month’s income on paper before the month even begins.

My wife and I sit down sometime prior to the first of each month and spend our income for that month. We both work in the same place and get paid bi-weekly the same day twice or three times a month. We have direct deposit. We decide for each pay period how much for food, cash allowance, and church giving, which we split up bi-weekly. The rest is allocated according to the date or pay period due: mortgage, power, gas, water, etc. We then pick a pay period and allocate categories like clothes, medical, vacation, gift (Christmas shopping, which is done in July and August, comes out of this), car (for purchase and repair), and savings (other investments are all pre-tax, so we don’t include those in our budget). We then transfer all of these last expenditures into savings or our Freedom Account, a special checking account for irregular expenses. We keep track of the various accumulating categories in a spreadsheet. Rental income is ignored, as that money goes directly into its own account and is not touched unless for repair or purchases of properties.

Every penny is allocated to one of these categories (or others, as the need arises). So, theoretically, at least, there are zero dollars at the end of the month in our primary checking account.

Now, not everyone who uses this system separates the irregular expenses from the primary checking, although the money is still allocated to a category. They don’t have the problem we do with the need to leave a cushion, but we find the Freedom Account cleaner.

Next, use the envelope system.

For each pay period, for each category that is not a bill that you mail in, such as groceries or gas or allowance or entertainment or whatever, withdraw the amount planned and place it an envelope marked Groceries or Cash (allowance) or Gas-Car 1 and Gas Car 2, or whatever.

When the Allowance envelope is empty, that's it. No more spending in that category. When the Groceries envelope is empty, that's it. No more groceries. If you feel you must spend more, then take it out of one of the other envelopes and do NOT take it out of the bank.

This places concrete, physical limits on your spending. No numbers in your head or figures in the bank, but real object that you can see you are running out of (or ARE out of).

If you don't want to carry that much cash with you, that's fine. Have two sets of envelopes, one that you lock up, one that you carry with you. When you get ready to go shopping or whatever, take money out of the envelope in the lock box and put it in the envelope for that category that you carry with you.