Here’s When Spending Your Whole Paycheck Each Month Is a Brilliant Move

23,067 Views
A man works on paying his bills at home.
Geber86/Getty Images

Here’s a simple question for you: Are you spending more than you earn each month?

Let’s get even more specific: Are you spending exactly what you earn each month?

If you create a zero-based budget, that’s precisely what you’ll be doing. Believe it or not, it’s a simple budget plan that guarantees you’ll spend every penny you make each month in a productive manner.

Let’s face it: Budgeting sucks. Nobody really wants to put a bunch of rules on their monthly finances. It feels constrictive. It feels like your money starts to rule you rather than you ruling your money.

But the fact of the matter is that setting a great budget doesn’t restrict you — it actually sets you free.

How a Zero-Based Budget Works

Dave Ramsey, who’s been rumored to know a thing or two about money, is a champion of the zero-based budget. It is simple, straightforward and lets you account for every dollar.

The first step to figuring out your zero-based budget is to track exactly what you earn each month and start saving until you have one month’s worth of income tucked away for emergencies. For argument’s sake, let’s say you bring home $4,500 per month.

For that same month, track all your expenses. Start out easy with the bills you know you have each month, like your rent or mortgage, utilities, cell phone, internet, cable, car insurance and car payment. These should be fairly stable, so you’ll probably know how much money to allocate for each.

Here comes the not-so-fun part.

Now it’s time to look at your more variable expenses. These could include groceries, clothes, entertainment, eating out and gifts. You can break this down in as much detail as you want. If you want to add categories for alcohol, parking, coffee or other personal choices that you know are a big part of your spending, you can.

Finally, let’s look at your debt. List out your credit cards, loans and any other debt you have. What did you pay toward each of those last month?

Chart of Your Monthly Expenses, both Fixed and Variable

Kristy Gaunt – The Penny Hoarder

You should have a list that looks something like this:

Housing $1,455

Utilities $135

Cell phone $145

Internet $45

TV $65

Insurance $275

Car payment $235

Groceries $541

Clothes shopping $145

Entertainment $345

Eating out $550

Gifts $35

Credit cards $140

Loans $320

Savings $0

TOTAL $4,431

Wait a minute. Didn’t we just say that you bring home $4,500 each month? You’re golden, right?

Not quite. First of all, you have $69 in spare cash floating out there. Keep that in mind for the next part.

Make a Budget With Goals in Mind

Before you start building your budget, take a moment to consider your goals. Are you excited to eliminate your debt? Are you the type of person who simply can’t live without heading to the theater for three or four movies each month? That’s fine. You just need to figure it into your budget.

Now that we know what you made last month and how much you spent, let’s plan a zero-based budget for this month. Again, we’ll start with your known monthly bills.

Housing $1,455

Utilities $135

Cell phone $145

Internet $45

TV $65

Insurance $275

Car payment $235

Those haven’t changed, so that part is easy. However, now that you’re looking at it in black and white, did you know a little effort on your part could get you a discount on your monthly bills?

Now we’re going to mix things up. Let’s look at debt next. You know what you paid toward your credit cards and loans last month. This time, let’s think about how much extra you would like to put toward those debts each month. How about $100 more toward each so you can pay them off earlier?

Credit cards $240

Loans $420

How about savings? Is $100 per month unreasonable there? Let’s try it.

Savings $100

Now, let’s put in all of the rest from last month.

Groceries $541

Clothes shopping $145

Entertainment $345

Eating out $550

Gifts $35

Now we come up with a grand total of $4,731. Here’s where it gets tricky. You only have $4,500 to spend, so you’re $231 over budget.

Rework Your Monthly Budget to Fit Your Income and Goals

Now we have to find a way to eliminate that $231 of excess spending.

Try to make it easy on yourself. Giving gifts is fine, and we’ve established that you like your movies. But are there other things you can cut back on, like groceries and eating out? Let’s say you make these adjustments.

Groceries $450 (-$91)

Clothes shopping $100 (-$45)

Entertainment $300 (-$45)

Eating out $400 (-$150)

Chart of Your Monthly Variable Expenses

Kristy Gaunt – The Penny Hoarder

You may have to cut back on one movie or skip a couple meals out to meet these new numbers, but it seems reasonable, right? For groceries, it may simply mean keeping a closer eye on deals and cutting back on things you don’t really need or typically waste.

Here’s the good news: Those cuts have saved you $331. That’s $100 more than you needed to balance your budget.

Now it’s time to work that $100 back into the budget to bring the total take-home income remaining to the all-important $0. If you’re comfortable with your current numbers, you could put that $100 toward your credit card payment. Think of how fast you can eliminate that debt! Otherwise, you can divvy it out to cover more fun stuff or pad your savings.

You’ll be amazed at how quickly you can get ahead without feeling like you’ve robbed yourself of the fun activities you like. You can still do them — you just need to factor them into the budget so you’re not dipping into your savings. Need help getting organized? Use these budgeting worksheets to start plotting your spending.

Warren Ward, certified financial planner with WWA Planning & Investments in Columbus, Indiana, recalls one couple who successfully used this approach with his help.

“Their finances were in great shape, but it was their peace of mind that struck me,” he said. “No worries about retirement and no arguments about money. They were both on board with the strategy, so both adhered to it.”

Peace of mind. That’s what a budget should be all about, right? A zero-based budget may not be for everyone, but if you need a way to focus your spending and pay down your credit cards, it’s a great place to start.

Tyler Omoth is a senior writer at The Penny Hoarder who loves soaking up the sun and finding creative ways to help others. Catch him on Twitter at @Tyomoth.