Updated: April 28, 2020
I first heard about the zero-based budget planning system from author, Dave Ramsey. During that time years ago, I was already using the Envelope System to manage my expenses.
Upon realizing how similar and complimentary the two methods are, I’ve decided to incorporate both systems into my budget planning.
Did you know what happened after around three months into doing this? I became a grumpy saver.
Truth be told, it wasn’t easy telling your friends weekend after weekend that you don’t have the budget to go out with them.
And then there’s also those feelings of envy and self-pity whenever you see someone with new clothes or the latest gadget.
However, deep inside, I knew I had to endure. I knew that I have to be patient and believe in the power of delayed gratification.
Sure I was feeling grumpy and sad — but I realized that it was just my mind telling me to feel that way.
In reality, I was doing okay… actually I was doing MORE THAN OKAY.
When I thought about it, I realized that I have full control of my finances. My debts are getting paid and my savings account was growing.
And within a few months, I know I’d have enough money to start investing – and eventually, have enough income to afford luxuries. So from a grumpy saver, I became a “happy bohemian”.
Fast forward to the present. I’m no longer living like a bohemian and I could now afford most of the simple luxuries I wanted.
But interestingly, the way I do my budget planning hasn’t changed. Yes, I still do the “Envelope System / Zero-Based Budget Planning Combo”.
So if you’ve been living from paycheck to paycheck, deep in debt, and without a clear financial future. Then I suggest that you become a saver now before you turn into a financial disaster in the future.
I hope these simple steps on creating a zero-based budget can help.
How to do zero-based budget planning
1. Account all your income sources in a month. This is simple if you’re an employee. For entrepreneurs and freelancers, simply take the average of your monthly income for the past 3 to 4 months.
2. Track down all your monthly expenses – include everything – then categorize them into three types:
- Fixed expenses such as rent, mortgage payments, etc.
- Semi-fixed expenses such as electricity and other utility bills which fluctuate very little every month
- Variable expenses such as entertainment spendings and other regular expenses whose amount varies each month
3. Assign the exact amount from your income to fixed expenses first. Next, allocate part of your income to your semi-fixed expenses (try using the highest amount from the past three months). And lastly, budget what’s left of your income to your variable expenses.
4. The key here and what your main focus should be is to make sure that all your monthly expenses are covered by your income.
5. What if my income is not enough to cover all the expenses?
- First, identify which are necessities and let go of the non-essentials
- Then decide on specific things you will do to earn some extra income
- Moreover, find ways to lessen your costs in your necessities, i.e. save on your electric use
6. What if my income is more than enough to cover all the expenses?
- First, congratulate yourself because you’re actually living below your means.
- Then, assign the extra money you have to ‘Savings’ or ‘Investment Budget’
- Lastly, allocate some of it to ‘Luxury Expenses’ (you deserve the reward)
7. Adjust your budget until all your money has been “spent on paper”. Don’t stop until every cent has been assigned – which means your ‘Income’ less your ‘Expenses’ is equal to ‘Zero’ (thus the name of the system).
8. Review your budget status and progress once a week. Constantly work on how you can improve your system until it becomes a habit.
Doing zero-based budgeting will be difficult at first but it gets easier as months go by, trust me. What’s important is to have a healthy mindset about what you’re doing.
Let go of envy and self-pity and have an optimistic attitude. Know that someday, with enough patience and persistence, you will become smarter with how you handle your money.
And best of all, you’ll live without financial worries and be happier than you are today.