How to Create a Monthly Budget That Works

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How to Create a Monthly Budget That Works If you feel like you never seem to get ahead financially, Table of Contents or don’t know where all your money is going, it’s time 3 What is a Zero Balance Monthly Budget? to learn how to make a monthly budget that works 5 Step 1: Find Your Financial Goals for you. 7 Step 2: Gather Financial Documents 9 Step 3: Add Up Net Income But… you’ve heard this before, right? You’ve tried a 13 Step 4: Tally Spending [Expenses] and Categorize 15 Step 5: Quick Budget Template: Income Minus Expenses = ? monthly budget planner or used a budget template 17 Step 6: How To Make Monthly Budget Adjustments that was supposed to make your finances fall into 21 A Personal Budget Case Study: Robert and Alice Greenspend 0rder. Although most people (90%) say that everyone should have a budget, only about 30% of us do. Problems with eliminating debt or building up savings are all too common. Across all income levels, people give your struggle to get ahead in their financial lives. money a job

So how do you make a monthly budget that works? An increasing number of people are employing a “Zero Balance Budget” strategy that gives all money coming in each month a ‘job’ – down to the last penny. How to Create a Monthly Budget That Works

What is a Zero Balance Monthly Budget?

Also called a “zero-sum” or “zero-based” monthly budget, the premise is to put an APB out on every dollar of income, and then tell it where to go. At the end of the month, each dollar has gone somewhere to do its job.

No, this doesn’t mean you spend every dollar you have every month.

And no, it doesn’t mean you give it to someone else to manage for you!

You simply list all of your bills, spending needs, savings goals, and debt payments, then make every dollar do one of these jobs! At the end of the month, the goal is to have exhausted all of the monthly revenue you took home – or – be back to a ‘zero balance.’ Lots of folks do make a plan to have some buffer funds that stay in the checking account in case of miscalculation, but the idea is the same. zero

Helpful Tip: It’s important to have a checking account that doesn’t hit you with a fee for having a low balance! Fee-free stuff. Yes! You can still have money to spend on your favorite pizza checking is real, people! place or on that new pair of shoes you’ve had your eye on. The point isn’t to spend zero money, but to make your net income In a Zero Balance Budget, here are some of the ‘jobs’ your money work for you. Instead of just taking care of bills and spending the does for you: paying mortgages or rent, buying groceries, making rest of your paycheck mindlessly, you’ll be working towards your auto loan payments, filling up on fuel, contributing to retirement financial goals. If this sounds like a game-changer, consider our accounts, bulking up emergency savings, and spending on fun free eBook guide for how to create a monthly budget that works.

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Step 1: Find your Financial Goals your Have you seen those beautiful vision boards on Pinterest where GO BACK people cut and paste pictures of their hopes and dreams on a big TO SCHOOL poster board and then decorate it? Don’t worry, we won’t make future you do that. DONATE TO But the process of how to plan your family budget does take HOMELESS some visualization and goal-setting in order to be effective. Take SHELTER TRAVEL a moment and consider the lifestyle you are currently leading. EVERY SEND KIDS SUMMER Where do you live, work, and play? What you do with your free TO PRIVATE time? What stresses you out financially? Close your eyes and SCHOOL think about this for a moment. (No, really, you should do it.) FOSTER ABANDONED PETS Did you know that visualizing your goals can actually change your reality? A study showed a 13-30% increase in muscle strength EMPLOY A when individuals simply thought about doing strengthening CLEANING exercises. SERVICE

Knowing the power of visualization, now picture your desired OWN A lifestyle. Is it different than your current reality? What are some of TESLA HAVE MY BUY A your dreams and goals for the future? Don’t just say something FIXER-UPPER like ‘pay off debt’ because yes, although that is important, right DREAM now we’re focusing on your dreams and aspirations. Think big! WEDDING

If you are like most people, there are probably areas that you’d RETIRE improve if you could. Choose three of the visualizations for your EARLY desired lifestyle and future goals/dreams. Write them down! EMERGENCY Once you have your goals in mind, you’re ready to plan your FUND monthly budget.

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Step 2: Gather Financial Documents

The first step to an improved financial life is knowing how much money you make and where that money goes. In order to do this type of tracking, it helps if you have the following documents. Gather the ones below that apply to you.

One month’s worth of:

• Bank statements – or log in to online banking and view transaction history • Pay Stubs and/or 1099 Forms • Credit Card Spending Reports and Statements • Proof of Income Letter (if receiving Social Security benefits) • Tips or commissions totals • Unemployment Income – Award Notice

The nice thing about going directly to your financial institution (using statements or online banking) is you can usually view and sort your transaction history as needed for a particular purpose. More to come on this in following steps.

improve your financial life

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Next, put yourself in one of these income categories – regular or Step 3: Add Up Net Income irregular. (Both are putting money in your pocket, so both are great!) What is Net Income and How to Calculate Net Income Net income is take-home pay or the amount of money you get If you make about the same amount of money each time it comes to keep after deductions and/or taxes are removed from the in, you are a recipient of regular income. gross amount. If the amount you make varies significantly because of tips, Always use net income when making a monthly budget or commissions, hourly differences, multiple side-hustles, etc. then family budget. you are making irregular income. Tips for both groups are below!

“Regular” Income(s) Household Subtracted The amount from total of money If your household incomes are regular, adding up your income is gross income you actually receive pretty simple. Take a look at the income-related direct deposits you got into your checking account during a recent month, and Taxes and add them up. This is where your bank statements or online Deductions Net Income banking transaction history comes in super handy.

Helpful Tip: Many people have two paychecks/direct deposits per month (bi-weekly) but yours may be different! Gross Income The amount Find all income for the calendar month. of money you think you’re getting Another way to tally income without bank statements or online banking is to take a look at a recent month’s worth of paystubs/ receipts of income for all household members. Then, add these amounts up. Examples of taxes and deductions: Federal Income Tax, FICA (Social Security + Medicare), State Tax, Local Tax, Medical Side note on what counts as income: To answer the question I Insurance Premiums, 401k contributions, Life Insurance Premium, know someone is asking: no, your winnings from betting your Dental Insurance Premium and Child support/alimony friend he couldn’t eat 10 hotdogs does not count as income.

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Neither does the mail-in rebate you got for your recent vitamin purchase! Your scratch-off lottery ticket winnings don’t count either, unless you’re suddenly a millionaire – in which case, let’s talk!

“Irregular” Income(s) Household If you have one or more incomes that vary from month to month, listen up. You have two options:

1. Use the lowest total monthly income from the last 12 months 2. Use the average monthly income from the last 3-6 months

The first option is more conservative because it builds your budget off of the (likely) lowest income you’ll have. Then, it will reward you with extra dollars to allocate if you make more than that. The second option is probably a higher monthly number, which makes it easier to meet all your budgeting goals. However, you’ll be stuck if you make less than the average in any given month.

Once you’ve decided your approach, use the same tactic as a regular income household and add up income from either bank statements or paystubs/receipts. net income

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Step 4: Tally Spending (Expenses) and Categorize

Knowing your expenses is more than just arriving at a total. The zero balance budget approach allows you to analyze the information and then challenges you to spend every dollar intentionally. Bills This group includes anything you must pay in order to have your Where to find your expenses? Again, grab your bank statements needs met. and credit card statements. What payment method do you use to pay for things like groceries, pizza delivery, etc.? Make sure Dave Ramsey coined the idea of the “Four Walls” – Food, Utilities, you’re checking all of these sources for one month’s time to get Shelter, Transportation, to be prioritized and paid in that order. a good idea of your expenditures across the board. Other debt payments that are due monthly would also go into this category. Examples of bills to include when adding up this section: Start with a simple, three column sheet (see below!) and group expenses into three categories: • Groceries • Electric/Gas and Water/Trash Utilities • Mortgage or Rent • Auto Loan payment and insurance Budget Totals • Gasoline costs or public transportation fees • Debt payments due

BILLS SAVINGS SPENDING Savings Are you putting any money towards savings accounts on a regular basis? Record the total dollar amount you’re saving on a monthly basis from your net income.

Spending This category includes other areas you regularly spend your money on, such as clothing, dining out, vacations, entertainment, pets, etc.

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Step 5: Quick Budget Template: Income Minus Expenses = ?

If your Net Income - Expenses = Zero If you added up all your expenses (bills + saving + spending) and subtracted it from your income, hopefully, everything zeroed out. When that’s the case, all of your incoming revenue has a purpose and that can be adjusted as needed! You’re off to a good start. Move on to the next step!

If your Net Income - Expenses = Greater than Zero This just means that some of your money still needs a “job” in your monthly budget!

Let’s say your income, for simplicity’s sake, is $1,000 per month.

• Bills come to $600 • Spending comes to $250 • And you’re currently saving $50 per month in a savings account.

That means when you subtract all those expenses (bills/spending/saving) from your net income, you still have $100 left over – SCORE! In step 6, we’ll work on giving this money a job.

If your Net Income - Expenses = Less than Zero (negative number) This means you’re currently spending more than you make. Not to worry, we’ll address ways to tackle this! The first step is awareness.

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2 Person Arizona Averages Household Step 6: How to Make Monthly Monthly Living Costs

Budget Adjustments HOUSING $800 - $1,400+

GROCERIES $400 - $650 One of the primary goals of this monthly budget planner is to UTILITIES assign a measurable task or job for every penny that comes in $105 - $250 and goes out. Some folks subscribe to a basic 50/30/20 rule, PHONE $80 - $175

where 50% goes towards bills, 30% towards spending, and 20% TRANSPORTATION $75 - $250 towards different types of savings. But we realize that everyone CLOTHING $60 - $75 has different goals and different needs, so don’t get hung up on meeting these numbers. INTERNET $40- $85

PETS $40 - $160 Take the time to review your current net income and those three ENTERTAINMENT $40 - $125 categories of expenses – bills, spending, savings.

Ask yourself some questions, like:

4 Person • Do these numbers fit my quality of life expectations? Arizona Averages Household • Does my current budget deliver long-term financial Monthly Living Costs success?

• Am I saving enough for the things I want in the future? HOUSING $1,000 - $2,000+ • Am I slipping into debt? • Where am I willing or able to make changes? GROCERIES $550 - $1,200 UTILITIES $135 - $350

Another helpful question to ask is: TRANSPORTATION $150 - $400

CLOTHING $100 - $200

How does my budget stack up to others’ in Arizona? PHONE $100 - $190

ENTERTAINMENT $80 - $200+ We can help with this one. See infographics for average living costs by size of household. PETS $40 - $160 INTERNET $40- $85

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At this point, it’s a game of playing with the numbers. If you But what if you don’t know what to prioritize? Here’s what the haven’t already, download our free, customizable Excel experts say to focus on, if you’re just starting out in budgeting: budgeting template which coordinates nicely with everything we’ve discussed so far. Use it to plug in your numbers and see Pay for needs, plus some wants what happens if you take the $200 per month you spend on a Don’t be too stingy with yourself. If you leave $0 for spending gym membership and switch to a cheaper plan. That extra $150 money, you’ll eventually get frustrated and give up on your budget. per month could be a huge step in the right direction for a goal you have – such as saving for home improvements or paying Emergency Funds down debt. Start with a goal of saving $100 for an emergency. Put it in a separate account! Once you reach that, bump up your goal to $500. Next, shoot for 1 month’s earnings. When you’ve banked one month’s earnings, start working on 3 months. The goal is 3-6 months’ worth of funds, but baby steps are better than no steps at all! Did you know that 28% of Americans have no emergency savings fund? You’ll be ahead of those people in no time.

Debt Payoff Either focus on paying off high-interest debt first, or lowest balance debt first. Credit cards, retail loans, and lines of credit tend to have higher rates than car loans and mortgages. Make more than the minimum payment if you can, or simply make a fixed payment each month regardless of what the minimum is.

Helpful Tip: An APR over 9%-10% is considered ‘high.’

Specific Savings Goals Putting money to work for big-ticket items such as vacations, big purchases, or future down payment on a home or car tends to be goals a wise long-term strategy. This prevents you from throwing those expenses on a credit card in the future.

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A Personal Budget Case Study: Monthly Budget Percentage of Income Spent Summary Robert and Alice Greenspend $4,505 TOTAL MONTHLY INCOME $4,500 $4,500 $4,495 Take a look at Rob and Alice’s budget. This is where they were $4,490 TOTAL MONTHLY BILLS + SPENDING after following Steps 1-5 of our guide. $4,485 $4,475 $4,480 99% $4,475 TOTAL MONTHLY SAVINGS Spending money totaled almost $1000 per month, while they $4,470

were saving just $25 per month. Their financial goals were telling $25 $4,465

$4,460 them to set aside cash for an emergency. They also started CASH BALANCE thinking ahead to the big vacation they want to take within the $0 Income Expenses next couple of years. Alice noticed how much extra cash they’d

have if they paid off their credit cards and didn’t have that extra Monthly Income Monthly Bills + Spending Monthly Saving

monthly payment to worry about. Rob called the cell phone PER MONTH ITEM AMOUNT ITEM Bill or Spending? AMOUNT TITLE GOAL AMOUNT company and got their bill lowered by committing to using SET ASIDE Savings Income Source 1 $2,500.00 Rent/mortgage Bill $1,450.00 ? $25.00 Account less data. Utilities (Power + Income Source 2 $2,000.00 Bill $300.00 Water/Trash) Fuel & Income Source 3 $0.00 Bill $210.00 Transportation

Cell phone Bill $220.00

Groceries Bill $500.00

Car payment Bill $345.00

Student loans Bill $255.00

Credit cards Bill $85.00

Auto Insurance Bill $160.00

Spending on entertainment, clothes, dining Spending $950.00 out, household Robert and items, etc. Alice’s budget BEFORE adjustments

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Monthly Budget After discussing, they decided to cut down “Spending” from $950 to $500 per month. This gave them the ability to pay $100 Percentage of Income Spent Summary $4,600 extra to credit card debt each month and begin savings goals TOTAL MONTHLY INCOME $4,500 for “Emergency” and “Vacation.” See below for the changes that $4,500 $4,400 were made. TOTAL MONTHLY BILLS + SPENDING $4,300

$4,125 $4,200 Using a template like this after you’ve worked through some of

92% TOTAL MONTHLY SAVINGS $4,100 the details can really help set you in the right direction.

$375 $4,000

$3,900 As you can see, the idea of a Zero Balance Budget is to raise CASH BALANCE $0 Income Expenses awareness about your current spending habits and steer your money into more productive jobs. At the end of each month,

Monthly Income Monthly Bills + Spending Monthly Saving every penny can be accounted for and your financial future

PER MONTH should incrementally improve. ITEM AMOUNT ITEM Bill or Spending? AMOUNT TITLE GOAL AMOUNT SET ASIDE Emergency Income Source 1 $2,500.00 Rent/mortgage Bill $1,450.00 $5,000.00 $250.00 Savings Utilities (Power + Income Source 2 $2,000.00 Bill $300.00 Vacation $5,000.00 $125.00 Water/Trash) Fuel & Income Source 3 $0.00 Bill $210.00 Transportation Cell phone Bill $220.00

Groceries Bill $500.00

Car payment Bill $345.00 Student loans Bill $255.00 You work hard to Credit cards Bill $185.00

Auto Insurance Bill $160.00 Spending on earn a living. It’s about entertainment, clothes, dining Spending $500.00 out, household items, etc. time that money starts Robert and Alice’s budget working for you. AFTER adjustments

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Sources https://www.businessinsider.com/personal-finance/zero-sum-budget https://www.daveramsey.com/blog/how-to-make-a-zero-based-budget https://www.nerdwallet.com/article/finance/zero-based-budgeting-explained https://www.credit.com/blog/what-is-a-good-interest-rate-60455/#:~:text= According%20to%20the%20National%20Association,likely%20to%20be%20 considered%20high. https://www.bankrate.com/banking/savings/financial-security-june-2019/#:~:t ext=Nearly%20three%20in%2010%20(28,money%20is%20critical%2C%20 experts%20say. https://pubmed.ncbi.nlm.nih.gov/14998709/ https://www.daveramsey.com/blog/4-things-you-must-budget

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