What sort of budgeting method do you use? I have had a few questions about how I budget and write up my budget. Today I will share with you how I construct a zero based budget and provide you with a spreadsheet template example to load in your figures and edit so you can harness the power of your most powerful wealth building tool, your income.
What is a zero-based budget?
A zero based budget is where you allocate and plan in every cost until you reach zero.
Why it’s a powerful tool?
As human beings we would like to think that we are rational in the way that we spend our money but as the study of behavioural economics highlights our brain naturally links emotions with money and finance. Through rationally working through your budget and having a plan before each payday your mind has already been made up.
Two authors that I follow use different takes on this system. Dave Ramsey advocates for the use of cash and cash envelopes to manage the system so you can feel the true pain of your spending. The Barefoot Investor, Scott Pape, uses a three account method: spend, splurge, save and has all expenses electronically within these three categories.
How I budget: The Electronic Envelope System
I use what I have coined as the Electronic Envelope system. It’s a mixture of The Barefoot Investor and Dave Ramsey’s systems.
Rather than drawing out my money in cash I have different bank accounts for different sinking funds and items and I split the money at each pay. I have taken this a step further by having the name and amount I allocate each fortnight as the account nickname to make my life even easier when I get paid.
Now you know what a zero-based budget is let’s work through the steps of how you would create your own.
1. Figure out every single expense you have
Every. Single. Thing.
For me that means big things like board, food, health insurance and yoga subscription fees but also cuts across for trips to New Zealand to see my family and hospital costs associated with my health condition.
2. Write down all your regular costs
What do you buy weekly or fortnightly?
For me this is health insurance, charity, food, transport (Uber and public transport), restaurants and going out.
What do you pay for monthly?
I have sinking funds for the following expenses:
- Beauty appointment happens every four weeks
- Haircuts happen every six weeks
- Cycling expenses
- Yoga membership.
What’s a longer term expense?
This section is where you can save up for things that come up once a year to ensure you are ready for them. Once I started this system I didn’t realise how free it made you feel when costs came up as you already have the money in the account and ready to go!
Some of these sorts of expenses include:
- I buy my phone plan outright once a year – I only spend $15 a month on my cell plan
- I see specialists once every 6 months for my health condition
- I buy my airport lounge membership once a year
- I see my family in New Zealand up to 6 times a year
- I usually buy clothes every so often (although that’s something I’m trying to avoid this year with saving for my house)
4. Divide up your expenses
Once you have your figures up there divide each expense by your number of pay checks
I get paid fortnightly
- My yearly phone plan cost $180 gets divided by 26 fortnights so I know I need to budget for about $7 a fortnight to save up for this.
- I know my Xmas New Zealand flights will cost about $1200 so I know I’m looking at about $47 a fortnight to budget in.
- I know my hospital excess is $1000 so I know I need to budget about $39 a fortnight for this.
- My hair costs $85 every six weeks and my waxing costs $50 every four weeks so I know I need to put aside $45 a fortnight into my beauty account.
- My yoga costs $100 a month so I know I need to put aside $50 a fortnight to cover it.
- My psychologist costs $215 a month so I know I need to put aside $107.50 to cover it.
- My board costs $510 a fortnight
- My health insurance costs me $55.60 a fortnight
5. Create your electronic sinking funds
Log in online with your bank and create your bank account for each category and give them easy names with the amount allocated each payday.
My accounts include:
Bank 1 accounts
- Board/House expenses
Bank 2 accounts
- Everyday account (food, Uber,entertainment etc)
- House saving – once it goes in I never
Some people may choose to set up automatic payments but I am hands on and prefer to transfer the money myself on payday as it makes me feel excited.
Template spreadsheet example get you started
I have loaded the income at the moment at our current Australian female yearly average, $70,000 a year and the superannuation at our current Australian average, 9.5%.
What I have included in the spreadsheet some ideas of categories which you can change to fit your life (for example: I don’t have a car so no car costs, I pay board so no electricity or insurance costs, I don’t have a pet or kids so no costs associated with those things, I’ve paid off my student loan and credit cards so no costs associated with those).
Change up, play with and revise the spreadsheet to fit your current situation. On my personal one I have also created a saving estimation calculator down the side and a rough estimate of what my costs and mortgage payments will be at different mortgage interest rates.
Remember: I’m not a financial planner, in fact I have no finance qualifications and quit mathematics when I was 15. I’m just a person that is interested in finance that is sharing her personal journey.
My biggest recommendations when thinking about budgeting
Pay yourself first
Decide on a reasonable figure to put on debt/save/put into investments and and have that as a non-negotiable category in your list.
When I was on a low wage I had this set at $600 a fortnight which was at the time 50% of my after tax income, in the FIRE community they recommend that to reach Financial Independence that you focus on saving/investing at least 50% of your after tax income. At the moment I have this non negotiable figure dialled in at $818 a fortnight (gosh it’s been hard this year to keep this consistent as I love going out and spending money). But for me because my why is very certain and my plan for saving is firm my mind has already been made up.
Review your budget as you go and change things up
The first budget you draw up might not be perfect, cut yourself some slack and continue to review and revise. Things also come up that you need to factor in and amend things for, an example of this last year for me was my autoimmune disease flaring up and going into hospital and this year falling off my bike and fracturing my spine in three places.
Make sure you have categories for things you love
For me giving and charity are important as well as allowing myself money to go out and have fun as I’m a single lady.
What tips do you have for me to further improve my budget?
The Economiss is a single, female, millennial on a mission to buy her first home in Australia. A Kiwi by birth, she jumped over the ditch after she finished her tertiary qualifications in search of employment. The narratives quite often showing up online overshadowed her thoughts of buying a house alone changed in 2017 The Economiss started super charging her finances and saved over 30% of her after tax income towards her house deposit as well as cash flowing four overseas trips. In 2018 The Economiss decided to create a new narrative and share her journey saving 36% of her after tax income for a $60,000 house deposit by December 2018. Do you have some tips to share or want to be featured on the blog, please get in touch!