Making Every Penny Count With A Zero-Based Budget

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Maybe you use one of those nifty little budgeting books from the office supply store. Maybe you've created an impressive spreadsheet with pre-programmed formulas to calculate your cash. Or maybe you keep track of your green with sticky notes tucked inside the back of your checkbook.

It doesn't matter how you do it - unless your a multi-billionaire, budgeting is just a way of life. And if you do it right, if you pinch pennies, shop wisely and post-pone splurging on that sizzling leather coat you've been eyeing, you may just have money left over when you finish paying all your bills. After all, that's what the budget is for, isn't it?

But what happens to that leftover cash?

If you're like most, that's free money. Woo Hoo! Bills are paid and you've got cash leftover. That's money that isn't allocated anywhere for anything, meaning you can choose to spend it as you please, right?

Well... no.

At least, not if you're trying to get the most from your paycheck. And this is where the zero-based budget comes in.

Traditionally, your budget includes two basic columns: your income and your expenditures. If your income is $4000 a month and your expenditures total up to $3500 per month, then you've got $500 free and clear each and every month to spend. End of budget.

With a zero-based budget, you still have two columns. You still list your income and you still list all of your monthly expenses. But when you get to the end, you have nothing left over - zilch, nada... not one penny.

Where did that $500 go?

In a zero-based budget, you account for things that you normally just "leave to fate". Your gas for example, running money for the week and that $5 to buy the latest issue of Cosmo or Maxim or whatever it is that adorns your coffee table. In this type of budget, you list everything and I mean ev-er-y-thing, until you have absolutely nothing else left to spend.

Sound scary?

Of course it does! What happens if you have a flat tire and need to buy a new one? Or if your co-workers unexpectedly invite you out for the $3.99 lunch buffet? What happens if you run out of milk, bread or have a craving for a Snickers that just can't wait? What do you do then?

That's why you have to account for everything.

When building your zero-based budget, start out by listing all of your normal expenses. Rent, car, insurance, etc. - these are fixed payments that come due around the same time every month. Next, you're going to list your long-term items such as property taxes, annual vehicle inspections or medical checkups. Any big purchases your planning - that new plasma TV for example, can go into this list as well and then you break up the total cost into twelve equal payments.

But you're not through yet.

Equally as important is your "miscellaneous money". You need to allocate money for gas, groceries, movies or DVD rentals, parking meters, subway tolls or anything else you tend to spend money on. You can even create a "mad money" category if it makes you feel better, so that you have an allocated amount going into a fund just in case there's something you've left off your list. A savings account should be included here as well because if you're not saving, you're not really getting ahead.

You'll also want to create an emergency fund and this is oh-so-important in the zero-based budget process. The reason is that you're not likely to allocate money for flat tires and broken water heaters. Those things pop up unexpectedly and usually when you don't have money to spare. The emergency fund takes care of this - just be sure to keep it funded so that you don't end up short when an emergency actually occurs.

If you added everything up and came up with a leftover balance of zero, then yea for you! You now have a workable zero-based budget. If on the other hand, you ended up in the red, you now know why you've been having trouble keeping cash in your pocket. 

Let's face it: those magazines, fast-food runs and trips to the beer store all add up. $5 here, $10 there... and before you know it, you've just blown through $200 and have nothing to show for it.

That's where the zero-based budget can really help. By allocating money for absolutely everything, you can fine-tune how much you spend on eating out, going out and pleasure spending. Simply tweak your numbers until they fit with your income and you'll discover that you can live on a budget after all.