M is for Money

Does the thought of having nothing left in your checking account scare you? Don’t let it, in my budget the point is to spend every penny. It’s called zero based (or zero balanced) budgeting and I’ve practiced it since 2001, though I didn’t know it at the time.

Every Dollar has its Place

I am still using a version of the first budget spreadsheet I developed back in 2001. To me it is intuitive, a balanced budget means income minus expenses equals zero. Following the advice of the financial experts, I consider savings an expense. In this type of budget every dollar has its place, as a bill, to buy groceries or to save and invest. My early days with this type of budget didn’t go well. It has taken years to develop a budget rigid enough to meet my goals but flexible enough to handle the unexpected. I’d like to save you a few years with some tips I’ve learned.

Trial and Error

Don’t expect to get your budget perfect the first time. To start you need an accurate accounting of your monthly spending. Fixed expenses like rent or a car payment are easy to deal with, they’re fixed! Food, gasoline and personal spending tend to vary each month, first look at several month’s worth of prior spending. Set these expenses on the high end of that range unless you like breaking your budget. For utility bills I budget based on the highest month’s bills, this gives me a cushion. Natural gas is budgeted based on January or February’s bills, when the heat is always running. Electricity and water are budgeted based on summer costs, when the AC is on and I’m watering the garden.

Savings and debt repayments are part of the budget, you decide where to give emphasis. I treat savings like any other bill, the money gets transferred either automatically or manually when I am paying bills. You decide what categories of expenses to create and what items to include in your budget, as long as it subtracts out to zero. If it doesn’t, first check that you’ve included all your expenses. Budget based on the high end of what you expect to spend, you can always put unspent money towards savings or debts at the end of the month.

Keeping a Cushion

A rigid budget is certain to fail, you need flexibility to deal with the unexpected. I set aside money each month for pet expenses and house maintenance, two places I can expect large bills at the worst time. I may not use that money this month, but eventually I will need it. You can set up something similar for car maintenance, health care costs or whatever else you need.

To keep my budget simple, I only list the large expenses. Small things like mother’s day gifts, the AAA renewal or the newspaper subscription are filed under the category miscellaneous. I also use this fund to deal with unexpected bills or when I go over budget. The money I set aside for these various ‘funds’ is held in online high-yield savings accounts. This way my rainy day funds are also earning interest.

Cash Flow

It may be called zero based budgeting but you don’t want to actually run your checking account dry. Banks love those overdraft fees. I have several ways of dealing with this, first I have the cushion I’ve built into my expenses. It’s unlikely I’ll go over in every category the same month. I also use my credit card for many expenses - it’s a cash back card (Chase Freedom Rewards). I then pay it in full each month during the grace period. Using the card gives me time to transfer money from those online accounts, like my miscellaneous fund, and reduces the likelihood I’ll overdraw my account.

My other technique may not work for everyone. I get paid every two weeks, so I also budget bi-weekly. I front load the first half of the month with expenses that aren’t due till mid-month or later. This way I have the money in hand well before I need it. Last but not least, I have a savings account at the same bank as my checking. I have occasionally transferred money from my savings account to cover a cash crunch, I replace the money when my checking account catches up. In seven years with this budget I’ve never bounced a check.

Reconcile

If you’ve budgeted properly, you have just a little extra money left at the end of the month. Every two weeks I compare my actual account balance to the expected balance, if it’s low I know I need to transfer money from a savings account. If it’s high I have come in under budget and have extra money for savings – or debt when that was my goal. The motivation to have that extra bit at the end of the month keeps me under budget.

Why This Type of Budget?

I’ve only done this type of budgeting so I can’t give you a comparison to other budgets. The primary benefit here is every dollar is put to work, none sit idly in your checking account tempting you to spend. Since a zero balance is your goal you put that last $10 towards your credit card bill. To maximize your savings or minimize your debt, look to zero out your checking account.