A better way to create a budget


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.

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Guest's picture
Grey Walker

This is profound. I will have to think about it.

Guest's picture

I'm no partisan but Jimmy Carter as an example? The man that literally wrecked the economy? For a supposed nuclear engineer, he was a true Nitwit.

To Quote from your article:

"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."

That's Jimmy alright.

As far as zero-based budgeting, a good idea but no one's going to do it. A regular home budget isn't done by most households. What percentage of Americans even write out a budget, do you figure?

Philip Brewer's picture

I'm sure the next 30 years will treat Jimmy Carter much better than the last 30 years. In particular, on the topic of energy, Jimmy knew what was coming long before most people did. If we'd spent the past 30 years using cheap oil to build non-auto transportation infrastructure and renewable energy generation infrastructure, then the next 30 years would be a lot more pleasant than they're going to turn out.

As far as wrecking the economy, that was mostly the Fed's fault--and Jimmy was the one who fixed that, getting the Fed chairman to resign and appointing Paul Volker. The corrective actions didn't really take hold until Jimmy was out of office, though.

Finally, as you say, a full-blown zero-based budgeting effort would probably be more trouble than it's worth for most households. But I think there's a lot of value in the concept of setting all the budget categories to zero from time to time, rather than just accepting that next year's spending is destine to look a lot like the last.

Guest's picture

Jimmy Carter was the last "fiscal conservative" to hew to the definition of "conservative" as "one who conserves."

Since his ignominious defeat, the country's been on a debt binge, veering between borrow-and-bomb Republicans, and borrow-and-build Democrats.

It's gotten so bad that, today, most of the prudent Liberal Democrats I know think twice before voting for yet another education bond.

Guest's picture

Nice article. It definitely is a good idea every once in a while to look at each budget category with a more radical eye.

I do find, however, that the iterative process of tracking my expenses and income and adjusting my budget every month does a very very good job.

Jimmy Carter was way ahead of his time on energy issues. So far ahead that the culture wouldn't listen. It's always more appealing on the surface to just consume more stuff if it's available--which it has been. But i think that's changing, unfortunately, and I think this economic crisis/housing/credit bubble is really part of a larger and more fundamentally skewed environmental bubble. We need to start paddling hard away from the waterfall starthave any chance of not having terrible shocks and repercussions in the next 30 or so years. It will definitely be interesting.

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