My wife and I use a zero-based budget to manage our finances.  Each month, we sit down, discuss the next month’s expenses, and create our spending plan.  Here’s how you can create your own zero-based budget.

1. Create a List of all Sources of Monthly Income

• Paycheck A
• Paycheck B
• Other Income A
• Other Income B
• Other Income C

I use after-tax income (net pay) when creating my budget.  For those who work as employees, creating a list of income sources should be relatively simple.  For those who are self-employed and / or have irregular income, things can get a little more difficult.  Personally, a portion of my income is regular (I receive a paycheck) and a portion is irregular (I receive income from my web business).  I use the zero-based budget to manage my regular income and another method for managing my irregular income.

2.  Create a List of This Months’ Expenses

• Rent / Mortgage
• Electricity
• Groceries
• Telephone
• Cellular Phone
• Automobile Payment
• Credit Card Payment
• Donations / Tithes / Giving
• Child Care

At this step, we are not concerned about annual, semi-annual, or other non-monthly expenses, unless those expenses are due this month.  We’ll get to those types of expenses in a minute.  For now, list your actual expenses for this month.  For categories that fluctuate, you will have to use estimations.  Be realistic.  We will also cover savings contributions and accelerated debt reduction payments in just a bit.

3.  Create a List of Non-Monthly Expenses

• Automobile Taxes
• Insurance Premiums
• Magazine Subscriptions
• Annual Memberships

These are expenses that might not be due this month, but you still need to plan for them.  Divide the amount of each bill by the number of months between the creation of your budget and the time your bill is due.  For instance, if you create your budget in March, and your life insurance premium of $200 is due in June, you will need to budget $50 per month, each month, so that you will have funds available to pay that particular bill when it is due.  After paying that bill, you will have another full year before you have to pay it again, so your monthly allocation for that particular category, in this case life insurance premiums, will decrease, because you will divide by 12 instead of by 4.

4.  Create a List of Savings Contributions and Accelerated Debt Reduction Goals

• Extra Payment To Credit Card
• Emergency Fund Contribution
• Roth IRA Contribution
• Education Savings Account Contribution

These are non-mandatory contributions to savings, after-tax retirement, and education savings accounts, as well as accelerated debt reduction payments.  For those who are getting out of debt, this is where you would list the extra payment at the top of your debt snowball, debt avalanche, or debt deluge.

5.  Subtract Total Expenses From Total Income

Your goal is to create a scenario where total income minus total expenses will equal zero.

If you subtract expenses from income, and you get a negative number, you need to decrease the amount you have allocated for expenses.  Consider decreasing non-essential categories, like eating out or entertainment.

If you subtract expenses from income and you get a positive, you need to increase the amount you have allocated for expenses, savings contributions, or debt reduction.  Consider allocating more for debt reduction or college savings.

There you have it.  That’s how we create our zero-based budget.  If you have any questions or suggestions, feel free to leave them in the comments section.  My wife and I use You Need A Budget software to create our zero-based budget.  I strongly recommend it and I’m proud to have them as a site sponsor.  For those new to zero-based budgeting, I suggest outlining your budget on paper and then transferring your numbers to the budgeting software of your choice.

If you haven’t done so, consider subscribing to No Credit Needed via RSS or email.