Things You'll Need:
- Pay Stubs
- Copies of monthly bills
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Step 1
Write down all sources of income for the month - If you are a salaried employee, this step is simple. If you are not, or have irregular income, take an average of the last 3 to 4 months of income (assuming that your income is relatively consistent). Don't forget to add any extra money that you earn from eBay, odd jobs, babysitting, etc.
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Step 2
Write down all expenses for the month - Grab all of your bills from the previous month and make a list of all of your expenses. Try and include everything. These expenses should be things like your mortgage or rent, utilities, car payments, insurance, cable TV, cell phone, home phone, etc. If you think you may be forgetting an expense or two, create a category called "Misc".
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Step 3
Identify your expense types - Expenses usually come in one of three types; fixed amount, semi-fixed amount, or variable amounts. Examples of fixed expenses are rent, mortgage payments, and car insurance. Semi-fixed are things that do not fluctuate too much from month-to-month (within $10). Examples include your cell phone bill (assuming standard contract charges) and TiVo. Variable expenses tend to fluctuate more than $10 per month. In my city, you pay your water bill once every three months. The amount due is based upon how much we use during those three months. This bill always varies by $30 to $40.
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Step 4
Assign your income to fixed and semi-fixed expenses - Start with your monthly income amount and assign these dollars to pay for fixed and/or semi-fixed expenses. I tend to start with these expenses first as they tend to be non-negotiable and may have terrible ramifications for late or missing payments.
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Step 5
Assign remaining income to variable expenses - With the remaining income, assign these dollars to pay for variable expenses. To determine how much these expenses are likely to be in any given month, I usually take the last four times I paid this bill and create an average. I use this average to determine what I use in my zero based budgeting process.
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Step 6
Adjust expense categories until your income equals your expenses - This is the most difficult step in creating a zero based budget. It is here that you must define your values. What do you find important? What do you spend money on that you could do without?
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Step 7
Positive Balance? - Great! You have a positive balance. You still need to assign every dollar a job in order to truly have a zero based budget. In this circumstance you could pay down your debt (i.e. debt snowball), save for retirement or your children's college, give more to charities, etc.
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Step 8
Negative Balance? - Do not get discouraged. Re-define necessities! Identify what is truly important AND necessary. Try and eliminate anything that you do not absolutely need. Earn more money by getting a second job. It is not forever, just until your income exceeds your expenses.
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Step 9
Review your progress - Review your progress weekly. Knowing where you stand financially at all times will really help you in this process. Make adjustments as necessary.
Comments
amylaine said
on 10/18/2008 Interesting