Beginner Budgeting: Assign Every Penny a Destination

Welcome back to another installment of my Beginner Budgeting mini-series!

If you’re new, start here, then go here, then go here. Be sure to come on back when you’re done!

If you’ve been following along for the last few weeks, here’s a reminder of where we are in the series:

Know how much money you make.
Track your expenses.
Assign every penny a destination.
Start. Right. Now.
Be Flexible.

These tips are based on my own successes (and failures!) as I pave my own path toward financial freedom. I hope that some of them may also be helpful for you!

Today, we’ll be diving into the important job of assigning every penny a destination.

What do I mean by that exactly? I mean every single cent that makes its way into your bank account should be directed toward some sort of expense or savings category.

Another name for this budgeting method is zero-based budgeting. Essentially, zero-based budgeting describes the process of taking your total income, subtracting your total expenses, and ending with a value of zero.

Simple.

Yet so rarely practiced.

Many people (including the me of the past) account for their bills every month and then stop there, with no real plan for what to do with the surplus. The danger in this style of budgeting is that the surplus often disappears, *POOF*, before you’ve had a chance to put it to good use.

Before I started my own budget, I used to pay my bills at the beginning of the month, buy groceries when we needed them, and gas when my tank was low. Everything that was left in my bank account was simply “extra” money to do with what I pleased.

There was no forward thinking or saving for a rainy day.

After all, I had my credit card. If I needed an emergency car repair, I’d just charge it and plan to repay it the next month with that ”extra” money I’d have left over after my other bills were paid.

The trouble is, when it came time to pay that debt from the previous month, it didn’t curb my spending in other areas. It should have acted as a wake up call that maybe I should be proactive about saving for the next “unexpected” expense, (I put “unexpected” in quotations because, as it happens, most expenses can and should be expected), but it didn’t.

I simply swatted away the irritating prospect of limiting my spending in any capacity and allowed the vicious cycle of borrowing and repaying to continue, reacting to every surprise expense with a swipe of my card. Month. After. Month.

And it was stressful. And it was depressing. And it was Simply. Poor. Planning.

I felt like I had zero control over my finances. Because guess what? I had ZERO control over my finances!!

Enter zero-based budgeting. Again, all cred goes to the Davester. Ramsey that is.

I began to look at my total net income as more than just two expense categories (“bills” and “everything else”). I began to realize that, if I wanted control, the “everything else” figure HAD to include things like “car repair”, “groceries”, “clothing”, “motor vehicle tax” and every other expense that would inevitably come my way throughout the year.

It was time to stop living paycheck to paycheck, as they say, and start figuring out a plan for my money.

So, here’s what I did.

I downloaded a sample budget worksheet. I use Dave Ramsey’s Monthly Cash Flow Plan but there are so many others out there. A quick Google search will yield thousands of options. Do you need to use one? Nope. A notebook would do just fine. The reason I found this most helpful is that it provided a list of things that most people spend money on. Because I was starting from scratch, I simply did not have the awareness or foresight to generate this list on my own.

I grabbed my trusty old TI-83 calculator. #throwback

I plugged in our net monthly income.

I subtracted our fixed expenses (think recurring bills, e.g. mortgage, car insurance, cell phones, minimum student loan payments, etc.).

I subtracted our variable expenses (think monthly expenses that vary in amount, e.g. groceries, clothing, electricity, fuel, extra student loan payments, etc.). I did this by looking back over my bank statements and expense-tracking notes and making a rough estimate of how much I could anticipate spending in specific categories in a given month.

I did this until my calculator read “0”.

If there were any expenses left unaccounted for, I went back and reallocated money from a different variable expense category that I had some measure of control over (e.g. “groceries”, “clothing”, “entertainment”) until every expense I could think of was covered.

That’s it.

Now, an important thing to remember: most budget worksheets begin with the “needs” (think housing costs) and end with the “wants” (think entertainment). For this reason, many people are surprised by the amount they are left with by the time they reach those final expense categories. Often times, it’s a significantly lesser amount than they were allowing themselves prior to beginning a budget.

Because all of our “extra” money was being redirected toward aggressive debt repayment (credit cards and student loans), our initial budget did not leave much room for frivolous spending. In fact, I think one of our first drafts allowed for something like $5 a month for “entertainment”.

$5.

A month.

For two people.

What were we supposed to do with that?!

Yes, we’d like two double cheese burgers, please. But hold the double. And the cheese.

But the funny thing was, I didn’t really care. I mean, I cared, but I actually felt…better.

Suddenly, I had a plan for my money. And that felt good. Suddenly, every expense that I could reasonably predict was accounted and budgeted for. While it certainly wasn’t all shopping sprees and frappuccinos, it was by far the most freeing experience of my budgeting journey.

So, why is zero-based budgeting so effective? Because it forces you to face reality and take responsibility for your spending. Every cent of it.

Sometimes, it laughs in your face and says, “You want to spend HOW MUCH on that tropical vacation?!”

Other times, it puts a gentle, yet firm finger to your lips and says, “Shhh. Don’t speak. I already know.”

But best of all, it helps you take control of your money by reminding you to plan for those inevitable expenses that would have previously knocked you on your tuchus.