If you think that household budgeting and going to the dentist sound like the same level of torture, then you have come to the right place. Following a budget is something that we avoided for years.
Then our children moved out. Feeling trapped in a town we no longer knew if we wanted to live in, we discided to get our finances together. We discovered how powerful and liberating a household budget is.
When it comes to creating a budget, the recommendations out there are endless. Two of the most popular household budgeting plans are the zero-sum budget and the 50 30 20 budget plan.
In this article, we will help you to develop a plan that is suites your life and your goals. We want you to be able to create a budget that you too can find success with your money.
Creating a household budget to get our finances in order
In 2018 Rob and I had to face reality. Our children were all grown up and ready to live adventures of their own. We found their enthusiasm and excitement exhilarating as they ventured out and found their places.
We found their experiences so exhilarating that we both had to ask ourselves what do we want to do now?
The problem was is that we did not know if we could afford to turn our dreams into our reality.
With $50,000 in nonmortgage debt, we were living the American dream of the paycheck to paycheck lifestyle. We had the desire to follow our children’s lead and explore life beyond our four walls, yet we found ourselves trapped by our financial decisions.
With careers, we no longer had a passion for and stuck in a small town that only held memories of raising our kids; we knew we were trapped because we didn’t manage our money.
We didn’t pay attention to our money because we didn’t truly understand the power of a household budget.
Budgeting tips: Budgeting for Beginners: 9 Useful Tips for Creating a Budget
Do you need a household budget?
Budgets have a bad rap. When Rob and I were starting our lives together, we had to budget every penny. There was a time that we would celebrate if we had twenty dollars left over at the end of a pay period.
It was as our finances improved that we found ourselves not “needing” a budget. The more money we made, the less we saw a need to keep track of it. For us, a budget became associated with a time in our lives that we struggled.
With a credit score higher than 800, we were not struggling; or at least that was our mindset. We felt that since we had a high credit score, we were good at managing our money.
It wasn’t until we found ourselves trapped by our debt that we realized our credit score is not an indicator that we are good at managing our money. Our high credit score merely is our report card for how well we pay off debt.
The realization that we had is that we were not good at managing our money. The reality was, if we did not adopt a budget, we would not be able to retire with dignity.
A household budget is your plan to financial freedom
Neck deep in debt and coping with our newly empty nest, the time had come for Rob and me to take action and develop a plan that focused on our financial freedom.
We started this journey of financial freedom with the tool we feared using the most: a budget. The crazy thing that we have found is that a budget, a realistic budget, is the most liberating tool for managing a household.
The thing that we learned about a budget is that it does not tell us what we can’t buy but what we can buy. You see, budgeting is a process of creating a plan on where you will spend your money. It is your spending plan that provides you with the freedom you seek.
A household budget provides you with the freedom to make empowering decisions that are based on the financial impact today and tomorrow.
Let’s get started with your first budget…
That’s right; this is just on how to get started with your first budget. Budgeting is just like brushing your teeth and eating. Budgeting is a recurring task.
To reap the full benefit of budgeting, you must realize that you must be in tune with your goals by continually talking about your goals and evaluating your progress to ensure that you are on track.
Working a budget includes:
- Create a monthly budget,
- Track your income and expenses, and
- Continuously monitor and modify your numbers to ensure that they are meeting your current goals.
Changing your financial present and your financial future with a budget is a very personal process that you will customize with time. Our number one advice to help you get started with your budget is to keep it simple!
A complicated budget with unrealistic numbers is not sustainable and is sure to set you up for complete failure.
Build a cushion: If you typically spend $800 on groceries, set your budget to $850. Having a buffer ensures that you do not come up short at the end of the month and creates a system that you can find 100% success!
To accomplish your first budget, we are going to use a hybrid of two popular methods: zero-sum (zero-based) budgeting and the 50 30 20 budget plan.
What is zero-sum budgeting?
I am sure that this one is going to come across as totally hokey, but I am convinced that a zero-sum budget or a zero-based budget is magic!
It was when we started following this budgeting plan, Rob and I magically found enough money to pay off over $50,000 worth of debt in six months with annual take-home pay of $80,000. (Pay Off Debt Fast | 11 Things We Did to Pay Off $50,000 6 Months)
The point of a zero-based budget is to make income minus the outgo equal zero. If you cover all your expenses during the month and have $500 left over, you aren’t done with the budget yet. You must tell that 500 bucks where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. Tell every dollar where to go. – Dave Ramsey
Why does a zero-based budget work?
For years Rob and I lived paycheck to paycheck. I guess in some ways we lived a zero-based budget because we spent every penny we earned. The difference is that we spent every penny we made on stuff, we carried debt, and our savings and investing was willy-nilly at best.
With a zero-based budget we still “spend” every penny we make; this most significant difference between now and then is that we know where we are spending our money.
We prioritize our spending and ensure that we pay ourselves first through debt pay off, savings, and investing.
Zero-based budgeting works because we plan to pay ourselves first!]
Zero-Sum budgeting example
Below is an example of the power of zero-based budgeting. This example highlight how the “Grand Total” equals $0.00. The “Grand Total” line of this budget is made up of the “Income” line item of $6,128 and the “Expense” line item of -$6,128.
In the example above, you can see that Income less the Expenses equals $0.00. The true power found in managing your money with this budget technique is due to:
- This budget focuses on simplification: In the example, you can see that there are very few categories. When Rob and I started budgeting, we created a category for everything. The thing that we quickly learned is to keep it simple.
- Make sure that your categories focus on your goals: This budget focuses on covering today’s expenses while planning for the future. By using specific savings accounts called an emergency fund and purpose-driven sinking funds, you are balancing to zero every month while building wealth and stability. Be sure to read: Sinking Funds & Emergency Fund | Savings Accounts that Rock
- The budget incorporates fun: When you are setting up your budget, be sure to include fun. If you cut out the joy from your life, sticking to your budget will be impossible.
When we first started budgeting, we had a large percentage of our income going to “fun.” Over time our definition of fun has changed a bit and has shifted towards investing.
What is the 50 30 20 budget plan?
The 50 30 20 budget plan went mainstream with the 2006 publication of the book All Your Worth: The Ultimate Lifetime Money Plan by Senator-Presidental Candidate Elizabeth Warren.
This rule book design is to help you to find balance with your money.
The concept is to divide your after-tax income into three categories: Needs – Wants – Savings
Each group is entirely subjective and encourages you to think about your finances and place a value on each of your monthly expenses.
The spending on each category directly relates to a percentage of your income.
- 50% of your income is for NEEDS
- 30% of your income is for WANTS
- 20% of your income is for SAVINGS
Although these “rules” are not hard an fast, they are rules that help you dig deep and decide what value you place on your monthly expenses.
When Rob and I began budgeting in 2018, our savings rate was $0.00 due to our debt and the money in our savings category was put to work to pay off those debts.
Back then the idea of having a 20% savings rate was unimaginable. Today, we have worked our way up to a 40% savings rate.
50% of your income on NEEDS
Needs are those items for sustaining life. The basics like food, water, and shelter. The tricky thing here is that identifying the difference between needs and wants can be blurry. It is a percentage that you must be truthful with yourself when identifying these expenses.
For us, we use the expenses that are in this category to determine how much money we need on hand for our Emergency Fund. All of the items that we classify in this category are the ones that we need to live.
We refer to our NEEDS as our LIFE expenses on our budget! Our current LIFE expenses account for 48.45% of our monthly budget.
30% of your income on WANTS
The wants category is a significant category; this is the category that makes budgeting fun by allowing you to reward yourself for all your hard work.
“All work and no play makes Jack a dull boy” is a proverb. It means that without time off from work, a person becomes both bored and boring. The exact origins of the phrase remain unclear, though it was recorded as early as 1659. Wikipedia
By incorporating play into your budget, you increase your odds of success. When you increase your odds of success, you develop a plan, a strategy that you want to replicate.
For Rob and I, we refer to our WANT category as our FUN category. Right now our FUN category only represents about 10.35% of our budget. It is a bit on the low side because our primary WANT right now is working toward our four-year goal of becoming millionaires.
The beauty of setting up a household budget is that it is entirely customizable for your current goals. With the 50 30 20 budget rule, you have a great foundation that prioritizes saving money.
20% of your income on SAVINGS
If you are anything like we were going into 2018, a 20% savings rate seems unattainable. With the 50 30 20 budget rules, saving 20% of your take-home pay is a priority.
By following this rule, you have a guideline when making any new purchase. “Will I need to sacrifice our savings goal to purchase this item?”
It is this simple question that makes this budget method successful for building wealth. It is a built-in accountability factor that makes sure that you keep your spending in check!
We identify our SAVINGS category as our SAVINGS AND INVESTING expenses which currently account for 41.20% of our income.
Back in the 1960s and 70s, U.S. families typically saved roughly 10 percent of their personal disposable income, according to the U.S. Federal Reserve. That percentage fell steadily during the 80’s and 90’s, and hit rock bottom at just below 2 percent on the eve of the housing bubble collapse. The recession seemed to nudge consumers into more conservative spending habits, and by 2012, the savings rate had perked back up to double-digits.
Those days seem to be over. After a mini-peak in 2015 at about 6 percent, savings rates have fallen pretty steadily and now sit at 3 percent … not far from where they were before the last recession. That’s barely enough to keep up with inflation, meaning in real terms, on average, Americans aren’t really saving anything. – USA Today
Creating a zero-sum budget using the 50 30 20 rule
Now bringing both of these concepts together will help you to develop a budget that incorporates need, want, and savings while allowing you to find any surplus so you can fund to your current goals.
In the zero-based budgeting example below, we account for all income by need, want, and savings.
NEED = Life
WANT = Fun
SAVINGS = Savings and Investing
Putting your new budget to work for you
So now that we have laid out a budgeting plan that you can stick to, now is the time is to get started with your debt repayment and your savings and investing goals. To help you out, we have put together a ton of budgeting resources that will make this process easy for you.
- How to Pay Off Debt Without Any Money | Paycheck to Paycheck
- Save Money Fast | Step by Step: Save Money on a Tight Budget
- 43 Free Budget Printables | Get Organized & Pay Off Debt in 2019
- Budgeting for Beginners: 9 Useful Tips for Creating a Budget
Thank you so much for stopping by. Tell us your budgeting story in the comments below! We love celebrating other’s success!