I remember thinking Zero-Based Budgets were inefficient when we first started budgeting. I thought, “This is good advice to give the masses. But we’re different. A Zero-Based Budget is holding us back!”
At the time, Megan and I were taking Dave Ramsey’s Financial Peace University and thought it was great (or at least I did). We had only been married for a few months and were ready to start our budgeting careers…just not using Dave’s less efficient method.
I wanted to budget for all the mandatory monthly expenses, look at how much money was left over, and try to spend as little if it as possible. We could quickly save a lot of money. I thought this was the most efficient method as Megan and I lived very inexpensive lives. We both liked boring things – like doing nothing. We both were debt-free except the house, which she bought three years earlier and able to easily make mortgage payments with her income alone; so my income was just icing on the cake.
I figured this method of budgeting would be “more efficient” because every time we spent money it would hurt. And I wanted it to hurt! That was money we should have been saving, not spending at Tumbleweed.
So what happened? To my surprise, it hurt! Every time we went on a date I thought, “This is fun and we should be saving money”. If I went to lunch with coworkers I thought, “This is tasty and I should save this money”.
That’s when it hit me – a Zero-Based Budget doesn’t save you the most money, period. It saves you the most money while living and enjoying a normal life over a lifetime. By switching to a Zero-Based Budget we are able to save a lot of money AND enjoy spending some of it! We budget savings money. And we save the savings money. We budget spending money. And we spend the spending money. No guilt or regrets involved.
A Zero-Based Budget is not about saving money. It’s about controlling money…which then saves money. This budgeting technique, more than any other, helps redirect your money from frivolous things to more important ones.
What is a Zero-Based Budget and how does it work?
A Zero-Based Budget is a proactive budgeting technique where one allocates all income to specific categories of expenses before the income is actually used. As an example, we will assume one’s after tax income is $2,000 a month. This person would assign each dollar to a specific expense category (food, shelter, transportation, entertainment, savings, etc) until every dollar was placed into one category. The “expenses” for the month will be $2,000. Thus $2,000 income minus $2,000 expenses equals ZERO on the first day of the month.
Why is this important?
There are two misconceptions regarding money allocation in personal finance. First, we overstate our mathematical competence. We are terrible at math. Even the brightest among us cannot mentally update the various accounting ledgers that we call expense categories.
It’s not an issue of math, but rather an issue of psychology. The value of anything is determined by what it’s compared to. We cannot compartmentalize money and feelings; and feelings are what get recorded, not money. Spending $100 on a bottle of wine you don’t like feels like $1,000, but spending $100 for wine at your wedding feels like $1. The truth is, it’s still $100 – but your mind doesn’t know that!
The second misconception is that money can just sit somewhere. The reality is that, one way or another, it will be used. Each dollar has to be told what to do – even if it’s just going towards savings.
Considering approximately 75% of Americans live paycheck-to-paycheck, most people you know are broke. How did they get (and then stay) this way? We’re they living reckless lives of sex, drugs and Rock ‘N Roll? I doubt it. I can safely assume their problem was not living recklessly, but rather living wastefully.
This is what happens when money just sits there – it gets wasted. There are always things to spend your money on. We do a little bit here, and a little bit there. And then wonder where our money went!
All of this wastefulness is eliminated with a Zero-Based Budget. Every dollar is earmarked for a specific purpose. It could be earmarked for a mandatory mortgage payment, or it could be earmarked for a night on the town. I don’t care what you do with each dollar, as long as each dollar knows what you’re doing with it well before you actually do it.
Financial fitness starts with a Zero-Based Budget
Creating and following budget is not hard. It is not restrictive. It is not another reason to fight with your spouse or feel terrible about your financial condition.
It simply gives us the awareness and reminder that our future is dependent on our current actions.
Most financial burdens are birthed from ignorance, not stupidity. A Zero-Based Budget acknowledges opportunities for awareness.