The only easy way to create a budget is to start with what you spent last month (and last year) and copy the numbers forward. If you don't do that, you're going to miss some important expenses. However, you don't want to just uncritically accept those numbers, or even those categories.

In Kate Luther's excellent post on Making every penny count, she uses the term "zero-based budgeting" to mean tracking every penny, so that every expense goes into the budget, with zero left over to just vanish (spent on little things that didn't make it into the budget). It's a great idea--that's the way to find the little blind spots where your spending doesn't match your true values. But I've heard the term zero-based budgeting used to refer to something else that's also a good idea.

A few years ago, back when Jimmy Carter was president, something that he called "zero-based budgeting" actually blew up into a big political issue.

Jimmy's idea was to avoid the common practice of starting your budget by just filling in whatever you spent last year as your starting point. Instead, start from zero, and figure out what you really need to spend. It's a powerful notion, because it gives you a chance to take a fresh look at expenses that otherwise seemed locked in.

In the normal budget process, you'd fill in the "electric bill" line on your budget with what you paid last month or last year. (If you were very conscientious, you might go so far as to get a year's worth of bills, come up with a summer average and a winter average, and then adjust both for expected changes in electricity costs.) What Jimmy Carter called "zero-based budgeting" was to start at zero, and then figure out how much power you need to run your household, and then budget for that much.

Now, on the electric bill, that's not so easy to do. (Jimmy would have had you looking on the back of each appliance, reading how many amps it takes, estimating how many hours a day it'd be turned on, and then adding it all up.) But it's a powerful concept, because it's your best chance to find savings.

Once you get beyond putting in compact fluorescents and turning out the lights when you're not using them, how can you make real headway in cutting your electric bill? The only way is to get down into the nitty-gritty detail of where the electricity is going. How much goes for power adapters that are left plugged in when the device they charge isn't in use? How much goes for TV and stereo devices drawing power when they're idle? Does your old refrigerator draw so much power that you'd come out ahead buying a more efficient one? Jimmy's style of zero-based budgeting gives you a structure for looking at expenses this way.

The electric bill is probably the toughest one to do a zero-based analysis on (although there's enough money there to make it worth putting some effort into). Your other line items aren't going to require quite so much research and calculation.

• Instead of just filling in the "rent" line on your budget with the number from your lease, analyze your housing needs and then look for the cheapest place that satisfies them.
• Instead of just filling in a guestimate of your last month's grocery bill, do some serious thinking about what you want your family to eat, and then calculate how much it would cost to feed them that diet. (I bet it's cheaper than what they've been eating, as well as healthier.)
• Instead of just filling in your car payment and insurance payment, think about what transportation you actually need, and then figure out the cheapest way to provide yourself with that transportation.

Probably the biggest pay-off comes when you can start with a category at zero and then just leave it there.

That, by the way, was why it was such a big political issue for Jimmy. Everybody was used to the process where you started with what was spent last year, adjusted it up for inflation, and then considered making a cut if necessary to balance the budget. Everybody in government had a program, and nobody liked the idea of their program starting at zero, for fear that it just might stay there.

No doubt every line item in your budget has somebody who wants you to spend the money that way (even if it's just you). But there's a lot of power in the idea of starting each line at zero and then figuring out how much money you really want to spend there. Even the big line items (in fact, especially the big line items) are worth revisiting from time to time, even if those expenses seem locked in.

Consider starting your budget with zeros in every category. It's a powerful tool for finding savings, and a powerful tool for making sure that your spending aligns with your values.