Creating a Zero-Based Budget for Saving

If you read last weeks post in this budgeting series, hopefully you’ve had some time to think about why you want to tackle your savings goals.  If you didn’t, you can read that post here.  This week we’re going to get into the nitty gritty of planning a zero-based budget.  The goal of a zero-based budget is to have $0 dollars left at the end of the month with it being properly allocated to bills, and everything left over in savings.

We’ll cover how you decide 1) which expenses are non-negotiable, 2) where you can cut, 3) how to cut sustainably, and most importantly, 4) how to make sure that you’re saving the most that you can every month.  We’re creating a monthly budget because most bills occur monthly.  If you have bills that come up less frequently, you should divide their total out over all the months and save for them through the months when they don’t occur.

Budgeting for Non-Negotiables

When you’re on a mission to save as much as you can, you really start to question what things are non-negotiable, but this should be where you start.  What are the bills that your life cannot function without?  We’re talking about rent/mortgage, healthcare, insurance, electricity, phone, gas for commuting to work, groceries, trash/water/sewer, and possibly internet depending on your job/lifestyle.  For us, internet is one of the non-negotiables, because my husband is in IT and must frequently work from home, and because the internet is a valuable tool as we home educate.  Some people may decide that internet is negotiable.  With the wide availability of unlimited data plans for phones, deciding against having a private internet connection does not mean that you’re renouncing the world and technology, but it might save you a $50 bill every month.

Non-negotiables should not include anything for basic entertainment. Do not include cable, or Netflix, or anything that is not essential to performing your job or your actual existence.  We’ll get to entertainment categories in a minute.  This is all about seeing what your raw bills come out to.  Look at your last several months of bank statements to find the real numbers for these categories.  Bills like electricity often dip and surge depending on the month of the year, so budget for the higher possibility.  As you go along, you might find that your grocery bill is higher than it needs to be (it is usually one of the easiest bills to make cuts in), but don’t worry about that right now.  We’ll get there, but right now you need to use the numbers you have.  When you have those numbers added up, find the total and tattoo it on your forehead.  Okay, not really, but do write it down and keep it close at hand.

Finding the Difference Between Total Income and Bills

Now that you know what your non-negotiables are, add up all income over a month and find the difference.  This number is important because it is what you can actually save.  Nobody likes this part, but the number that you subtracted from your total income is what you could live on.  It is important to at least try to imagine a universe in which you live on this amount and save the rest of your income.  Run the numbers.  How long would it take you to achieve your goal?  Would it be worth it to do several months of this spending freeze now or eventually? 

Where Can You Cut Expenses

If you’re feeling uncomfortable right about now, you’re not alone.  Remember how I told you that goal-setting is the fun part of creating a budget?  This is the most unpleasant part of creating a budget.  Most people have a lot more money that IS technically negotiable than they feel like they do in the month to month.  That is why we’re budgeting!  We’re deciding what is most important to us and we’re deciding what we’re willing to give up to achieve bigger goals.  Ultimately, everything else that you add back into the budget is going to cut into your savings, and it’s important to keep that in mind.

So, start thinking about what you can cut.  What can you live without?  Cable?  Netflix? Subscription boxes?  Another way to think about it is, what do you LOVE doing?  What things bring you immense joy and satisfaction?  Can you narrow it down to just one or two things?

You also might be feeling super gung-ho and like you’re ready to cut all those extra categories that have been sapping your savings.  That can be a great way to jumpstart your saving, but that kind of intense savings is usually sustainable only in the short-term.  If you try to keep it up for much longer than a couple months, you’re likely to fall off the wagon entirely, or go blow the budget in a big way.  If you don’t want to add any entertainment back into the budget for now, great, but choose a way to reward yourself as you hit short-term goals.

Make Saving Sustainable

Misery is not sustainable in the long-term.  If you cut everything out and absolutely hate your life, you’re not going to keep to the budget.  The trick is to find the least expensive things you enjoy doing, and practice contentment.  That’s not to say if you have a few things you love doing you are always going to find it easy to stick to the budget.  But, you will be more likely to be able to keep your eyes on the prize and be content with less.  

Find your frugal treats.  Maybe it’s Netflix or Audible and Kindle Unlimited.  Maybe it’s $100 of personal money every month so you can buy an occasional coffee and subscribe to some fun little subscription service, or have your hair done.  Maybe you want to be able to buy pizza one Friday night every couple weeks or once a month.  You want to cut back, but you don’t necessarily want to cut all.

We budget a small amount of personal money and we have always kept Netflix and/or Amazon Prime in the budget.  Ultimately, those are inexpensive forms of entertainment, and when we combine them with the use of the library (free) and other internet resources we find ourselves more than content in our indoor entertainment.  We don’t do gym memberships or the like—we get outside and walk or hike, or we do home workouts on Youtube.

What is the Point of a Zero-Based Budget?

Everything that you don’t spend goes into savings.  Everything!  Here’s why.  If you decide you’re going to save $500 bucks every month, you might move that $500 into savings every month, but chances are, if you end up with an extra $40 because the electricity bill was low, or you worked a little overtime, that money will disappear into the ether.  You will find something that you “need” to spend it on, even though you had no idea you’d have it at the beginning of the month.  By defining all these categories and putting hard limits on them, you set yourself up to take advantage of any extra-money situations.

Finally (or Firstly) Have An Emergency Fund

But what about surprise expenses?  The car breaks down, somebody needs to go to the doctor and you have to pay the deductible, or even pay for it out of pocket?  Life happens, and it makes it really hard to save!  That is where the emergency fund comes in. If you do not want to be dipping into savings or calling a halt on your pay-off plan everytime you have to meet an insurance deductible or put new tires on the car, the very first thing you save for needs to be an emergency fund.

The amount in the emergency fund can vary based on what you think you are likely to need.  We like to keep 6 months of expenses for our family, so that even in a job-loss scenario we have a healthy cushion for living and any other big expenses that might hit us all at once. Not everybody feels the need to keep 6 months of expenses on hand and that is totally okay too.  You need to have the amount that would take the stress off in any given situation for YOU. 

I hope this little series has helped if you’re trying to get a budget started. It really all comes back to the question I asked last week: What is your why? Why is this important to you, how important is it, and what are you willing to give up to get there?