I have met with a whole range of people who have very strong opinions on this matter. From one end of the spectrum to the other, people who believe budgets are a waste of time to people who believe that budgets could actually save lives!
Just go down to your local fire department and ask them what they would do without all of that equipment they use every day to save lives...I bet you can guess where the money came from to provide those brave men and women with the tools they need to do their job.
Yep, that’s right...a good old fashioned budget.
Maybe budgets at that level are incredibly obvious right? Organizations of a certain size...and certainly governments need budgets, otherwise they would crumble. So how in the world do budgets apply to you and me?
That’s an excellent question, and I’m glad you asked!
I bet if I were to ask you where in the world you’ve heard of something called Zero Based Budgets, you’d probably say Dave Ramsey. That’s a pretty good answer because Dave Ramsey has done more for the country in terms of spreading the gospel that is budgeting than any other person, in my honest and humble opinion of course.
But would you believe that the concept of Zero Based Budgets goes back much further than Dave? Not only that, did you know there are several different types of budgets? So which budget is right for you and do you even need one in the first place?
I have a friend who does incremental budgeting, which is basically where you set your monthly budget based on your previous months spending.
Does it work? Sure, but are there any landmines you need to be aware of...absolutely. One of the biggest issues is that it encourages “spending up to the budget” or a “spend it or lose it” mentality (shoutout to Tutor2u Business).
I have another friend who just keeps a “cushion” of cash in his account, and then just looks back each month at the spending and says, “That was my budget for that month”, then tries really hard to not overspend the next month. Ok, I admit, I’ve told this friend before that this is really not budgeting at all. That’s like waiting until the end of the month to balance your checkbook and then discovering there wasn’t enough in your bank to cover all of the checks!
So do I have a preference or recommendation for you? Definitely!
WARNING: This next statement is going to be mind blowing, earth shattering, jaw dropping...ready…
Everyone should have a budget!
I don’t really care which method you choose, Zero Based Budgeting, Cash Flow Budgets, Incremental Budgets...the list goes on. Just pick one and go for it! You’ll never know where your money is being spent until you start tracking it with a budget.
The beautiful thing is once you start, it gets easier and easier to fine tune your budget, eventually you’ll be able to find ways you could save money and put it towards that dream vacation you’ve always wanted!
My personal preference is to use Zero Based Budgeting because it is so easy to do. It can literally be done on a piece of notebook paper (or in a spreadsheet for all you fellow computer folk out there) in 4 simple steps (courtesy DaveRamsey.com):
Step 1: Write Down Your Total Income
This is your total take-home (after tax) pay for both you and, if you’re married, your spouse. Don’t forget to include everything—full-time jobs, second jobs, freelance pay, Social Security checks, and any other ongoing source of income.
Step 2: List Your Expenses
Think about your regular bills (mortgage, electricity, etc.) and your irregular bills (quarterly payments like insurance or HOA) that are due for the upcoming month. After that, total your other costs, like groceries, gas, subscriptions, entertainment and clothing. Every dollar you spend should be accounted for.
Step 3: Subtract Expenses From Income until you get to Zero.
This is called a zero-based budget, meaning your income minus your expenses should equal zero. When you do that, you know that every dollar you make has a place in your budget. If you’re over or under, check your math or simply return to the previous step and try again.
Step 4: Track Your Spending
Once you create your budget, track your spending. It’s the only way you will know if your spending is aligning with your plan.
That’s it! In Step 3, if you have are over before you get to Zero, as an alternative to going back to Step 2, you could just create an extra “expense”! You can use that expense for savings or for a new shiny financial goal.
There are lots of great apps out there to help too, most let you even link your bank account and get real time budget tracking!
Don’t give up if your budget is not perfect the first month or two (or three, or four...you get the idea), just keep going. Remember, the key here is to start and stick to the budgeting process, the exact mechanics of how you do it are not important. It’s time to pull a Nike, and just do it budget!