Many people have made a 2022 goal of trying to budget better and save for an emergency fund. It’s a difficult task for those of us who have a fear of not being able to buy what we want or have a fear of failing to live up to the challenge. For some, just the thought of looking at a list of numbers and “doing the math” is daunting. Debt makes budgeting even more difficult because we have to take a cold hard look at the road we are on and commit, with increased resolve, to buckle down and change our habits. That’s really the kicker…. changing our habits. My grandmother used to say that “The road to Hades is paved with good intentions.” We intend to save, but we don’t. We intend to curb our spending, but that yummy $6.00 cafe cold sweet drink with whip cream on top just looks too good to pass up. But there is hope. Zero-based budgeting might be just the tool to assist us in changing our habits. While it is ultimately up to us and our ability to say, “No, I don’t need this item,” a zero-based budgeting system can put a little more perspective on the fact that saving money is not giving up anything… we are just choosing to spend differently in order to achieve bigger and usually better goals.
Zero-based budgeting is not new. It’s the method our grandparents used, sometimes called the Envelope System. When our grandparents saved, often they would label different envelopes with a specified expense name. For instance, they would write, “Electricity, Water, Groceries, Gas, Entertainment, Dining Out, Emergencies, School Clothes” on different envelopes. When a paycheck was cashed, the money would be divided into those envelopes in the quantities pre-set by their budget analysis. Any extra money would not be carelessly thrown into their wallets to be spent on just anything. Extra money would be divided into the non-essential envelopes such as Entertainment and Dining Out. When a bill was due, money would come out of the correct envelope. When the money was gone out of a particular envelope, the money was gone. If you ran out of entertainment money, our grandparents simply waited for the following paycheck to replenish the entertainment envelope before having fun. They didn’t borrow from the Electricity fund to go out to dinner.
The essence of zero-based budgeting is that every dollar you make is spent or save for a very specific purpose. If you have extra money left over after you have paid your essential bills, the extra money must be allocated to specific items that are important to you such as New Car Fund, Retirement Fund, Dining Out/Entertainment, Savings, New Car, etc. There is no “Extra Money” category. There is no “Spending Money” category. There is no “Miscellaneous” category. Each dollar you bring in is allocated for a very specific purpose before it leaves your account. For instance, if you are paid bi-weekly and your checks are $1,200 each, that gives you $2,400 per month to spend. Once you list all your expenses on a spread sheet, deduct the amounts of each bill from $2,400. If there is anything left, divide that amount between Savings, Entertainment, Retirement, School Clothes, etc. You should end up spending or setting aside each dollar for very specific goals until there is no money left. Fun right? You get to “spend” every dollar by allocating it to a specific purpose (whether that be actually spending it or saving it).
In today’s world, the zero-based budgeting model can be accomplished by simply using a zero-based budgeting app such as Every Dollar, GoodBudget, or YNAB. Although Mint is touted as a quality and thorough product, it might not be the best product for a new saver who is struggling with over-spending or accomplishing their savings goals. Mint will track expenses, but it does not show the depletion of each of your categories as you are spending money out of those categories. It only shows the end total balance of your account. GoodBudget, for ease of use, is my favorite. Your home page is populated with your digital envelopes, depicted as a full bar graph in color. You decide how much cash you need in each one. When you are paid, your bar graphs for each category is full. As you spend out of your envelopes, each graph gets depleted slightly. Once your envelope is empty, it is empty. There is not more money to spend out of that category. However GoodBudget does not link to your bank account; you have to enter all your purchases as you are making them. But this might not be a bad thing for us new to saving as it will keep our spending “top of mind” and will remind us to spend thoughtfully instead of blindly.
Every Dollar also uses the zero-based budgeting tool. Its envelope system is not quite as visually clear as GoodBudget, but it is in the end, the same. Every Dollar does link with your checking and credit card accounts. This allows you to automatically sync the app so it is less work for you. However sometimes if the app doesn’t recognize a store, money gets deducted from the wrong category. This can be a problem if you are not going in and checking it for accuracy.
YNAB (You Need A Budget), also uses the zero-based budgeting system. At first glance I didn’t like how the YNAB mobile app was set up. But after opening up the full version online, I was able to manipulate the categories more thoroughly to come up with the category order and titles that worked for me. Once that was done, the mobile app synced all my preferences and it was easy to work with. Once I had YNAB set up the way I wanted it instead of their pre-labeled categories, I could better appreciate the app, especially since YNAB can sync with not only your bank accounts, but also your credit cards.
In summary, the zero-based budgeting system is the best system to use for new savers, people who are struggling to stick to a plan, or people who like to limit their fun money so they can achieve their savings goals. You can use a spreadsheet to make your budget or an app. In the end it doesn’t matter how you set up your budget. The goal is to stick to it and if you don’t succeed at first, don’t stop. Get up, dust yourself off, and try again.