Budgeting Basics Part 2: Creating a Zero Based Budget & Transitioning To Cash

Read Part 1 of this series here.


When my husband & I decided to pay off our debt, we knew that the first step would be to make a detailed plan with our money.   We had to tell our money where to go & what to do.  As Dave Ramsey often says, a budget is simply "spending money on paper, on purpose before the month begins".  We couldn't get to the end of the month & not know where we had spent our paycheck.

Creating a  zero-based budget is going to require some work, especially if this will be your first workable budget. It may even take you 3 or 4 months to get it right.  But, if you keep at it, it will likely do more to improve your financial situation than anything else. In the beginning, you may put too much in some categories and not enough in others. But don't worry, a budget is always a work in progress & it can be adjusted.

When you begin creating a proper budget, you need to know how the necessities in your life are getting paid for & how much is left over after they are paid.

We consider these 5 items to be necessities:

• Food
• How much do you spend on all grocery shopping & eating out each month?
• Shelter
• How much do you spend on rent or your mortgage each month?
• Utilities
• How much do you spend on your basic utilities (electricity, water, gas, etc.) each month?
• Clothing
• How much do you spend on clothing each month?
• Transportation
• How much do you spend on car payments, gas, car repairs, oil changes etc.

 Of course, there are a lot more items that could (and probably should be) listed as necessities (ex: diapers, toiletries, etc), but these are the 5 main things you need in order to simply survive.

When you first write down how much you are spending on your necessities, you may feel as if there isn't enough left over for everything anything else. If that's the case, then you simply have to trim your expenses or increase your income.  And in my opinion, you can't start budgeting the "non-necessity" items OR paying off your debt until you know exactly how much you have to work with.

In order to create a truly zero based budget, you have to know where every dollar is going each  month. Otherwise, you may be spending money you don't have (This makes me think of another one of Dave Ramsey's quotes: 'We buy things we don't need with money we don't have to impress people we don't like.').

Once you have your necessities accounted for & you know that they are being paid for, you then need to come up with a way to track the rest of your money.  My husband & I use the popular envelope system & I can say without a doubt it is one of the keys to keeping ourselves on budget.


Each month, we pay our necessities through online bill pay, via mail, etc.  We then pull out $520 in cash (we split this over pay periods) & put it into our envelope budget.  We separate this money into the following envelopes:

• Grocery= $40/week ($160/mos)
• I strive for a grocery bill of only $35 each week & thankfully, I'm usually able to meet it!
• Eating Out= $25/week ($100/mos)
• We often use restaurant coupons to stay within budget. If we do not end up eating out one week, we simply roll it over so we can splurge on nicer dinners if we decide to.
• Toiletries (including diapers)= $25/mos
• Since I take advantage of sales & coupons as well as deals I find on Amazon for diapers (and sometimes paying for my order through Swagbucks), I am able to always stay within budget!  We have personally decided that if we are all stocked up & don't need all of the money in this envelope, it can be transferred to a different envelope (ex. to food), if needed.  This is also more incentive for me to earn more Swagbucks!
• Medicine= $10/mos
• This covers our copay on my monthly prescription refill.
• Entertainment= $20/week ($80/mos)
• This is reserved for those rare nights when my husband & I are able to go see a movie or when we decide to do something fun as a family or with friends.  (We are often able to make the most of our entertainment budget with great deals we get through Groupon, Living Social, etc)
• Haircut(s)= $20/mos
• My husband gets his hair cut every 3 weeks & it costs $10 both time.  I don't save each  month for my haircuts, since I go about 6 months in between salon visits (you can read about how I save money by doing my own hair HERE)
• Clothes= $45
• This is $15 per family member per month. This covers shoes, socks, clothes, under pieces, coats, etc. for each person in our family.
• Gifts= $30
• We save a specific amount each month towards purchasing gifts (baby/bridal shower, birthday, anniversary, Christmas.  I make the most of the gift budget through sales, coupons & Swagbucks)
• Vacation= $30
• This is saved each month in case we decide to plan a family vacation or a fun family outing.
• "Blow" money= $30
• This is our miscellaneous money that my husband and I split between ourselves that doesn't have to be spent on anything in particular (ex-when I indulge in Starbucks or when he decides to buy a new dvd, etc).
• Total of Envelopes= $520 per month

The money that we leave in our accounts is accounted for at all times (my husband uses Quicken to keep detailed records). If you do not have Quicken, you can use Mint.com , which is a Free budgeting software that is very similar to Quicken. Any money not reserved for necessities or pulled out to be placed into our envelope budget, is transferred into one of our savings accounts (ex: our Emergency fund or our daughter's 529 plan)

At the end of the month, stop and evaluate how this budgeting system has worked for you. Do you need to increase any of the categories because your estimations were off? If so, re-work your budgeted amounts. There is nothing wrong with doing this.  Your budget is not written in stone-it's a guideline & tool to help you stay within your financial parameters.  It will change as you move throughout life.

If you have money leftover in any of the categories, roll it over to the next month. I recommend you wait at least a few months before lowering any category as it'd be better to have some extra than not enough.  Once you feel confident in budgeting your basic necessities, you can begin budgeting more or all of your income.

Knowing where every single dollar in our budget is going gives us a peace of mind & confidence that we know we are well prepared.  Following our zero based budget, along with using an all cash system, guarantees that you stay within your budget parameters because, with cash, when it’s gone, it’s gone.  It also ensures everything we need is covered, so we don't get to the end of our money before we get to the end of the month. 

Remember, don't be afraid of a budget, as it is simply a detailed plan for your money. 

“A budget is telling your money where to go instead of wondering where it went.”   

-Dave Ramsey

Next up in the Personal Finance series, I'll be explaining more about Dave Ramsey's baby steps & how they are working for us.  Stay tuned!

**You can find more Personal Finance posts HERE**