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If you’ve been googling about finances, I am sure you already came across the Dave Ramsey zero-based budget.
I first learned about the zero-based budget when I read Total Money Makeover, a book that has changed my outlook about finances. The lessons I’ve learned from this book made us more in tune with our money.
So after reading the book, I started budgeting using the zero-based budget. Given that I was a beginner back then, it worked pretty well with our family finances.
Until now, it is still the method that I am using, with some little tweaks here and there.
So today, you will learn everything that you need about this budgeting method; what is it all about and how you can start using it. So, Let’s dive in.
WHAT IS A ZERO BASED BUDGET
The Dave Ramsey zero-based budget is simply income minus expenses equals zero. The idea behind this concept means that all of the money that you receive from month to month should be accounted for and has a purpose.
For example, if you make $3000 a month, then all of that amount should be spread appropriately among your monthly expenses.
However, if for some reason, after you allocated all the appropriate amount to all of your budget categories, you end up with $200 extra, you then jump with excitement and head to the mall.
You will then go back to your financial goals and check your number one priority. If for example, you want to get out of debt, then use that extra $200 to pay down your debt.
The same is true when your primary goal to increase your safety net, you will add the $200 to your emergency fund.
So you see that in the Dave Ramsey zero-based budget, not a single dollar will be “wasted.”
WHY IS THE ZERO-BASED BUDGET THE BEST METHOD
The zero-based budget is the best method because:
If you are new to budgeting, then this is the best method for you. This method allows you to get to know your finances and your financial habits. When I was new to budgeting, I started with this method, and I’m so glad I did.
Every Dollar Has A Purpose
When you use a zero-based budget, you will be confident that no dollar will go astray. Each dollar will have a job, and you know exactly where it will go. Nothing is worse than having the money, and suddenly you don’t know where you spent it on.
Helps You Reach Your Financial Goals Sooner
When we started using the Dave Ramsey zero-based budget, we usually end up in the negatives. And it was frustrating at times.
However, as we got into the groove of managing our expenses better, we started seeing leftover money on our monthly budget.
And since our primary goal is to pay off our debts, we dumped it all towards debt. As a result, we were able to stay ahead in our debt payment plan.
Makes You Justify Your Expenses
As you start allocating appropriate amounts to your budget category, you will be thinking and justifying every amount that you put into it.
For example, do you really need $500 on dining out expenses? Or could you increase utility bill payment this month because you will have family visiting for a week?
Or maybe increase fun money this month since kids are out of school for the summer? Or maybe no need for gym fund this summer since you can run outside?
Keeps Your Expenses In Check
This goes hand in hand with justifying your expenses. When you have a zero-based budget, you will be more aware of spending habits. By knowing how much you have on a certain expense category, you can’t help but think twice whenever you make a purchase.
You’ve Got Total Control Of Your Budget
With zero-based budgeting, you’ve got total control over your budget. You have the flexibility to move each dollar around depending on your situation at that time.
At some point, your life will change and so is your finances so if you need to make a change on your budget, you can.
How To Set Up A Zero Based Budget
Starting a zero-based budget is simple; however, you need to make time. You need to make time to set it up and staying on top of it every month. You can set up a zero-based budget by:
Track And Add All Your Income
Your monthly income includes all forms of income that you receive every month. This can be your salary, side hustle income, dividend, investment income, and etc. Take the total, and that will be your monthly income.
But what if you have an irregular income?
When you have an irregular income, take the lowest income month that you’ve had, and use that amount for your budget.
List Down Your Expenses
To make it easier, gather all your bank statements, including a credit card statement from the previous month and list down all the expenses that you’ve had.
If you were using cash, try to brainstorm on the things that you have purchased.
Assign Appropriate Budget Amount On Each Expense Category
Add up all the amount that you’ve spent on a certain category and make that your budget amount.
For example, if you spent $489 on groceries last month, then you will assign a $500 budget for groceries. I usually round the number for ease of calculations.
Add Up All Expenses
After assigning all budget amounts to each expense category, add them all up, and that will be your total monthly expenses.
Subtract Your Income From Your Expenses
The concept of a zero-based budget is to actually have zero after your deduct all your total expenses from your total income.
However, it does not always happen that way. There are other two results from this equation.
Either you will end up with extra money, or you’ll end up with a negative result.
A negative difference is a result when your expenses are higher than your income. Simply put, you are living beyond your means. You are spending more than what you are actually making.
When this happens, go back to your expenses and re-evaluate. Trim down or eliminate unnecessary expenses.
Maybe, you do not need to spend $500 on dining out, maybe your grocery budget is too high, or you don’t need those extra channels on your cable, or don’t need a cable at all.
You might think it’s impossible to reduce your expenses, but as you go through each of them, you will find that there are a lot of areas where you are overspending.
On the other hand, a positive difference is when your income is higher than your expenses. You actually have leftover money after accounting for all expenses.
And as I have mentioned earlier, you do not drop everything and go to the mall immediately just because you found out you have extra money.
Instead, you will use the leftover money to take care of your primary financial goal, be it paying off debt or funding your emergency fund.
Track Your Expenses
Now that you have your spending plan in place, the only thing that is left to do now is to track your expenses. You can use the plain old’ paper, or cash envelope system, or if you are into technology, use budgeting apps.
No matter what you choose, just stay consistent in tracking your expenses. Tracking plays an important role in the success of your budget.
Zero Based Budget App
I used to do plain old paper budgeting and the cash envelope budget system in my early budgeting days. However, I found that it’s more convenient to use budgeting apps.
Don’t get me wrong, the paper-based and cash envelope budget system is awesome, and they absolutely work.
It’s just that as time went by and I got more comfortable with our budgeting, I needed something techier.
You see, I do everything on my phone, like EVERYTHING. If something happens to my phone (knock on wood!), I will TOTALLY be lost.
Everydollar is a zero-based budgeting app that I still use nowadays. I am still on the FREE version, and it still works for our budget.
I like it because I can just plug in our expenses as I go. I don’t have to worry about losing the receipt or forgetting to track.
The free Everydollar app also lets you customize your budget each and every month, which helps a lot because of our budget changes every single month.
There are a lot of budgeting apps out there but Everydollar is what I found that works with our family finances.
There you have it! That’s Dave Ramsey zero-based budget.
Starting a budget is easy, but that hardest part is making it work and sticking to it.
However, if you keep your focus on your financial goals, you’ll get there. You’ve got this!