My money background is that I grew up rather poor yet with a safety net of well-off grandparents.
Seeing my grandparents have a steady, full life unencumbered by financial stress or worry showed me money may not equal happiness, but lack of money more often than not did equal unhappiness.
In my tweens, I started babysitting and hording my earnings. I won’t say I was “saving” it. I literally kept my money under the comforter of my bed and *slept on it*. Like a dragon with treasure. This came in handy one night when my father received a DUI. But that’s another story…
As I made choices in my education and career that were more about a big, steady paycheck than my true passions, I also made frugal-ish decisions on where to live, what to drive, when to shop. I enjoyed living below my means and that served me well. I was able to shoulder the financial responsibility and let my first husband try different career paths. I was able to bail friends out of bad situations involving rent or car repairs.
All of this is to say I thought I did a good job budgeting my money because I always had the money I wanted or needed. I even felt that way when I quit my big, steady paycheck job as a software engineer to “find myself” in some college courses and part-time jobs. I felt that way because I had saved money and was frugal and never ran out of my savings.
Tom and I moved to Wisconsin; again with savings I’d planned for us. And we lived partially off those savings through the first few years of business ownership. Then we mortgaged my house for a nice lump sum to make huge renovations.
It wasn’t until I wrote the last check to our contractor, we moved back into the house with so much work still to do ourselves, AND we were 100% dependent on our business to live, that I realized I knew squat about budgeting.
I thought budgeting was about trying to spend as little as possible. I had always lived below my means, so I had no idea how to live *within* my means. I was used to leftover cash in slush funds for rainy days. Now we needed our income to be a hard line we didn’t cross.
“Zero-Based Budgeting”, in short, is the concept of knowing what your income is and budgeting so that you “spend” all of it. Income minus expenses equals 0. I’ve put the spend in quotes because you can “spend” it by putting into a savings account; the point is to tell every dollar you earn where to go and what to do.
I do not know who created this budgeting method, but it was popularized by Financial Guru Dave Ramsey. Disclaimer that I have never once listened to Dave Ramsey. I discovered zero-based budgeting by stumbling upon Stacey Flower’s YouTube channel.
Here are the 3 reasons why I love zero-based budgeting:
- Zero-based budgeting makes me spend within our means. For years even though I was a frugal – or more to the point *because* I was frugal – I never worried too much about spending from my savings. That set me up for failure when our savings depleted and I need to get strict with spending. Using a zero-based budget, I start with our income every month and start deducting expenses. When I get to zero, I’m done.
- Zero based budgeting makes me spend money. Remember how I said I was frugal? I’ve learned that’s not always a good thing. Trying to save a few dollars here and there on a tight budget can haunt you later. I’ve tried to stretch things too far and needed to buy “emergency” supplies at a high-priced store because I couldn’t wait to shop elsewhere. I’ve ignored a funny feeling while driving and ended up with a bigger car repair. It has taken practice, but knowing every month that I *have* to spend every dollar of our income means I spend our money better and plan for financial needs versus having them sneak up on me.
- Zero-based budgeting gives me a clean slate every month. Emergencies happen. Mistakes happen. I’ve forgotten it’s a month that we pay our life insurance. But at the start of every month I reflect on the past month’s budget, make adjustments, and start anew. In my previous “I thought I was budgeting but I wasn’t” life, I would set a “budget” once a year. If I spent more one month, it rolled into the next months’ spending. Maybe OK in theory – some months you spend more, some you spend less. But in practice it meant a financial mistake I made in February could haunt me until October. By making a zero-based budget every month, I get to hit reset. It keeps me optimistic and focused on the month at hand. And by not “docking” my budget by previous mistakes, I’m set up for success and realistic expectations.
Obviously I’ve glossed over a lot of the details of budgeting. How do I handle when a real emergency occurs? (We have an emergency fund savings account) How do I pay for large expenses like new appliances that may cost as much as our entire month’s income? (We have sinking fund savings accounts were we “spend” part of our income every month to save up for big items or travel) I wrote this to give a high level view of my financial history, zero-based-budgeting, and why I love it so much.
If you resonate with anything I’ve written here I encourage you to research zero-based budgeting for yourself. Let me know what you think!
In Progress Jess 