Dear readers. You have permission to call me a coward.
In the past ten months, my husband and I have really made great bounds in taming the financial situation of this household. We re-tooled spending, we began budgeting (first time ever) and we’ve so far paid off $34,000 in debt. But we’ve got a ways to go until we reach financial freedom.
Three weeks ago we began taking Dave Ramsey’s Financial Peace University (FPU) and learning Dave’s strategies (also outlined in Total Money Makeover). We’ve got our $1,000 in the bank and now we know what to expect to spend on everything each month.
Until now our “budgeting” has been fairly passive, but it’s still slashed our expenses. We set up a free budget template in Mint and then we get a text message when we go over budget. (It was more like behavior modification training than budgeting—something akin to those no-bark collars people put on dogs).
That said, when we got into the cash-flow plan in FPU, I was all for it until I sat down and started to put it into practice.
You see, the FPU plan calls for zero-based budgeting. That means you figure out how much you’re making each month, and spend it all on paper before the month is over.
Do you know what this means?
At the end of the month there is nothing left.
Quite frankly, this scares the living daylights out of me. Nothing in the bank and just $1,000 in savings between us and the real world? It feels like flying without a net to me in a wildly uncomfortable way. There’s nothing adventurous about this at all.
This is a little extra tricky because both of our incomes vary pretty wildly from one month to the next.
Now on the zero-based budget, the next paycheck will get deposited, the mortgage will be paid, and the rest will be cashed out into the envelopes. Leaving nothing in the bank. ::hyperventilating::
I’ll grant you that this has happened before, but never on purpose!
I’m committed though (figuratively, not literally…yet). This system is tried and true, and my “oh crap we’re outta money” text messages were passive and reactionary. In my mind, I knwo this. Having a plan is always better. I can do this, right?
Anyone else using zero-based budgeting? Are my fears irrational? Normal beginner’s jitters? Would love to hear your thoughts!
PS: For those wondering what we do with our fluctuating incomes to make a zero-based budget balance, we have a prioritized “wish list” (it begins with our remaining debts, and works up to items like new carpeting for the condo, replacing the kids’ mattresses, and saving for the next car). Months that we earn more than our budgeted incomes, the money is directed to the top item on the wish list. If we earn less than our budgeted amount, then we don’t fund items in our budget from the bottom up (planned debt repayment in excess of the minimum, recreation, “blow money” etc).
{ 13 comments… read them below or add one }
Jessica, I understand your worries but one of the items on your zero-based budget should be savings, debt reduction, or both. I think it scares you to see this on paper because, as you said, the leftover money is going to be spent somewhere anyway. Putting it on paper will hold you accountable for it now.
I’m a big Dave Ramsey fan, but this is one of the things I don’t like about his plan. In general I like the zero based budget, but my wife and I always put in a “buffer”. Dave says if you have some unexpected expense you need to have an “emergency budget committee” to see where you’ll pull that money from. That’s a bit much for me so we always had an extra hundred or so that if it didn’t get used we just put towards debt.
Also, if you have a wildly unpredictable budget you may want to put more than 1k in the bank so you can carry yourself through a rough month. Maybe a month or so of expenses, so if you have a low income month you can use your emergency fund, and build it up on a good month. Between a buffer and an emergency fund you’ll be fine.
I use zero based budgeting. I allocate all my money from each paycheck (on the 1st and 15th), but I don’t always spend the money immediately. I often make myself wait for more discretionary purchases (clothing and books) until the end of the month, just in case of unexpected expenses. I also don’t apply all of my snowball to my credit card debt immediately. I pay all my minimums and all but about $100-200 of my snowball immediately out of my first paycheck. That extra couple hundred I don’t pay until the last day of the month. This way I always have a couple hundred in my checking account that, while allocated to a specific expense, can be repurposed if the need arises.
But if your income varies month to month, zero-based budgeting may not be the best solution. If you can budget based on the bare minimum you can get in a month, then you can always use the excess as part of your snowball. If you can’t, though, you probably need to save some from the better months to make up the difference during the leaner ones.
I am fairly new at the Financial Peace plan too. The zero based budget is crazy scary for me! I 100% get it and am working hard at putting it into practice…but seeing every penny go just feels so scary! I’m hoping to see some comments here about how life changing it is
I agree with Mike D., I think you can allocate some of your zero-based budget to buffer.
I just read Total Money Makeover, and I was really resistant to the idea of a zero-based budget. However, now that I have set one up, I am finding that my money actually goes where I tell it to — I have much less of it wandering off unaccounted for, which is essentially what happened to every penny that wasn’t automatically allocated the day I was paid.
I also don’t take all of my cash at once. First off, I’m only paid bimonthly, so I cut my monthly budget into two parts. Second, I pay the vast majority of my bills online, so the money that those payees will get stays in my account. They are not all paid on the same day, so cash stays in there. Third, now that I’m onto this budgeting thing, I really like it! Both last week and the week before I spent less than I allocated for going out to lunch — I talked to my close coworkers and we decided to bring our lunches. I left that “extra” cash in my checking account as buffer. Now, granted, that’s about $65, but that’s a lot to me.
This is what works for me, I hope you figure out what works for you! It’s only the 5th of the month, too — it took you a while to get into the habit of acquiring debt, it will likely require a little more time to get into the habit of getting out of it, too. At least that’s what i tell myself!
I agree with you! I really hate zero based budgeting for the same reason. It stresses me out! Especially with kids in the picture, something is always going to happen. I’m a big fan of reverse budgeting.
I wrote an article on it here: http://www.milliondollarjourney.com/budgeting-simplified.htm
Love your article!
Zero based budgeting is real boot camp. Survive it and become stronger forever!
Thanks everyone for enduring my whining on the subject of zero-based budgeting. We’ve been at it a week now with the envelope system and it’s working beautifully. It’s just a pain in the kiester (no more than guessing how much to pay on a bill in hopes we won’t need the money later, I guess) .
It’s nice to know that everything is planned for–we even have an “unplanned for” category to catch anything we might have missed for the first couple of months.
No more shuffling, guessing or juggling. Payday comes in two days and we know exactly where to put every nickel.
Let’s not be so quick to jump past the “heart” of the zero-based budget.
Every dollar gets a PURPOSE, not every dollar gets spent. If I recall correctly from Dave’s methodology, the $1000 e-fund baby step is a launching point, ultimately you should have 3-6 months worth of expenses in savings. Why stop at $1000 initially if you’re uncomfortable with it. If Dave had suggested $2000 would you feel differently? $500?
Why are you cashing everything? Maybe you could try a modified version of the envelope system where you write the amount on the envelope, purchase and put the receipt in the envelope and subtract to find the new balance. Each purchase, instead of going for cash you can just look at the envelope for what is left from your plan. Just a thought.
Your mileage may vary, but what we found when we started to budget a purpose to every dollar, we actually started SAVING money. By purposing to only spend $100 in groceries each week – and actually spending $92, or $95, etc we started to accumulate balances in each envelope above what we planned to spend. Multiply that by a dozen or so envelopes and we’re talking pretty significant savings. That excess money helped us either knock out debt or build up our savings. Our account wasn’t dropping to $1000 each month, quite the contrary, it was growing as we became more conscious of our spending and spent less.
I like most of what Dave suggests but I will add that the Baby Steps (in my opinion) are more psychological than mathematical in nature. You don’t have to do them in the exact same order to get results; the order has just as much to do with how we feel about our finances and what changes most people can tolerate in a step by step plan. Whether you actually put cash in the envelopes or track your receipts, its your behavior that’s changed – that’s what matters.
I have been using Dave’s Allocated Spending Plan for…Wow! Nearly two years! I make copies out of the book, and now I have modified them so that I have 8 pay periods on one sheet. Anyhoo, I love it. You will find your own groove with everything. I did order his envelope system after getting tired of fumbling for the right envelope at the store; it’s now all tattered, and I am too cheap to order a new one…
I have found that the most valuable aspect for me, IS seeing the money spent on paper. It really keeps me in reality. I know where every penny goes, and were I ever to look at the account and think, “Hey look, we have extra money! Let’s spend some!” Noooo, that money is earmarked, and I know what for. Your ‘unplanned for’ category is perfect; I too leave a little extra $ in the account for incidentals; school pictures, field trips, or a forgotten auto-pay. Stuff like that can come out of that without causing stress, or needing an “emergency budget meeting.” I also budget our housing payment in two increments, so that half of it is in the account for the whole month. So the account will have money, we just don’t spend it.
The process is addictive, in my opinion. I now can’t spend any money until it’s all written out; the thought makes me sick. I think it’s just the fear of going back [there]- to the mindless spending place. I even HATE using the debit card, it makes me nervous, plus it is so much easier to balance the checkbook (which I never did before Dave anyway) when there are few transactions.
So let’s hear it for financial OCD! I’ll tell you, having your money go where you tell it to is very empowering. Looking forward to reading more from you! As always, best wishes!
For Glenda- you know, every penny goes either way, it’s just that this way, you know where it’s going/where it went. Hopefully, some of it is going right into your savings account, vacation fund, whatever, instead of…??? Hang in there!
Dave’s zero based budgeting approach is not as much of a financial exercise as it a psychological exercise. It helps you make a paradigm shift in the way you approach your finances. That is why it is hard. We are used to the run and spend method.
What helped me the most was dumping plastic and switching to cash. When you hand over a credit card to make a $100 purchase it stings a little. When you hand over five $20 bills and look at an empty wallet – it stings much more.
Good luck and stay positive!
Granted you may only have $1,000 standing between you and the “real world,” per se, but at least you got rid of 34k in debt… definitely not a bad move there. While I’ve never tried this “zero-based” budgeting myself, it seems to be gaining popularity throughout the online world.
Travis,
We’ve been zero-based budgeting and using the envelope system for a month now.
I’m positively flabbergasted at how well it has worked for us. I just reconciled the budget for the end of the month last night and planned the November budget.
It really, really does work well. Despite “murphyisims” like a tire replacement (it was in the budget) and some items that appeared that weren’t planned, we actually got everything taken care of with room to spare. $57.61 to be specific with really massive debt payments. It feels good to be this close to freedom.