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Every month, my bank account goes down to zero. AND YOURS SHOULD TOO.
Creating a personal budgeting system can be complicated, but here I'm going to simplify this amazing new way to think about your finances. I call it The Bossy House Budgeting System.
Dave Ramsey uses what he calls a "zero based budget." Jimmy Carter apparently introduced the same idea to the federal government.
The whole concept is that every single month, you should create a plan that uses every single dollar you earn.
How does The Bossy House Budgeting System work?
What are you doing now? Probably getting your paycheck and immediately paying your bills. Whew-- you met your obligations. But did you meet your goals? What about that lingering debt or your dwindling savings account? What about saving for college or retirement?
I've been there. You track your spending and create a budget based on what you think you need each month. It looks like you should have hundreds of dollars to devote to savings or debt.
Then you reach the end of the month and you have... nothing.
You've given up your morning latte but it hasn't made a difference. You never see that $5 a day again.
You make detailed plans to pay down debt or build up savings that seem reasonable, but you can't find that extra money after you pay your bills and go out to dinner a few times.
The "Down to Zero" concept means you create a plan that uses every single dollar you earn.
And wouldn't it be nice to go out to dinner a few times without feeling guilty? Or what about reaching the end of the month and not feeling regret?
You're not alone. 70% of Americans save less than 10% of their total income every year. Most of them cite "expenses" as the reason. Sound familiar?
This budgeting system is a plan to use every dollar in your bank account for something, and it prompts you to start with your goals instead of your bills.
The best part? My budgeting system does not rely on penny pinching to get financial freedom, but instead helps you make a plan you can stick to!
What are the steps to create a down-to-zero budget?
Start with Your Goals
Well, first you have to start with getting honest about your finances, which I wrote about extensively and should be the first thing you do.
But after that: why start with your goals? Because your goals are the things that should be the foundation of your plan, not your afterthought.
If your plan is "put extra money into savings," I know what happens to you because it used to happen to me. THERE IS NO EXTRA MONEY.
That's because we have a really hard time accurately predicting how much things will cost, and we have a difficult time holding back from spending what we have. Has your paycheck increased over the years but your savings hasn't? That's because you have absentmindedly adjusted your spending upwards as your paycheck has gone up.
Trick Yourself into Spending Less
How Much Do I Need Each Month?
Now you need to determine how much money you need to live on each month. This figure doesn't include your monthly bills. This is things like morning lattes, gas, paying the babysitter, groceries, drinks at the bar, dinners out, new clothes, trips to the zoo, and your spin class.
To easily figure this out, check out your online bank statement from your debit card for the last month. How much did you spend?
(Now hold it. In case you're berating yourself again for spending too much on lattes, remember that this plan does not include guilt or shame. We are making a PLAN. That plan might include fewer lattes, but it should not include making yourself feel terrible. Stop that right now. Just decide to move forward differently.)
After you add up all the things you spend your money on, you should take a good look and figure out which things you do not need to keep buying or spending money on.
You goal is to arrive at a reasonable amount that you need to live on each month. Make sure you're comfortable with the amount because when we're done building this plan, that is what you will leave in your bank account.
Calculate Your Bills and Annual Expenses
You'll calculate the amount you spend on bills each month, and then you'll also think about the money you spend on annual expenses.
Annual expenses are the costs that trip you up when they come due and you think "holy shit I wish I would have saved up for this all year." I'm talking about your taxes, school tuition, vacations, summer camp costs, and the bill for the security system.
These are things that, when they come due, they derail your savings or debt repayment plan. As in "I was going to put $300 to savings this month but I had to pay for my plane ticket home for Christmas."
Add up all those annual expenses and you'll be able to see how much you should be taking out of your paycheck each month to save up for them.
Put the budgeting system all together
Now, we put all of our calculations together to make a plan that sticks.
First, you determine the monthly total income, subtract your bills and your monthly cash expenses. (Remember-- that's the amount that you need to live on each week/month).
Then, subtract the portion of your income you need to designate each month to saving for annual expenses.
If you don't have anything left, then you don't have a way to afford savings or debt repayment unless you go back and lower your bills, lower your spending, or cut out annual expenses (like vacations or annual clothing spree.)
Here's where you need to take another honest look.
Ask yourself the following questions about your situation:
Use the Budgeting System Financial Report
Now is the time to put your calculations together in the Monthly Financial Report, where you can play around with how much needs to be in each category to make your plan work.
Here is where you have to watch yourself to make sure you're not leaving too much money in your spending account "as a cushion."
Remember, you will spend everything that is left in your spending account.
The idea behind this kind of budget is that you trick yourself into spending less because you leave yourself less money to spend. You make decisions up front about how the money will get spent that month instead of leaving it to chance that you'll have some left over.
How a Down to Zero Budget Changes Your Money Attitude
With this budgeting system, you will get down to zero each month, but you will do it knowing that you already paid your obligations and met your goals.
Each month, you don't have to do the planning and thinking fresh. You go with the plan you made.
Let's say that you want to buy concert tickets one month and you don't have the money.
You CAN decide that you can't buy them until the following week when you get paid. Or, you can decide this concert is an emergency and move money from your emergency savings so you can pay for the concert.
Change Your Budgeting System, Change Your Life!
You might be asking: how is this different than what I was doing before?
What's different is that you have already paid your bills, debts, and savings.
What's different is that when an "emergency," however small, comes up, you have planned for that.
And finally, the act of moving the money from emergency to spending accounts means that you are now thinking about this expense in the correct way. Instead of buying the tickets because you WANT them and considering that a regular expense, you are deciding the tickets are special enough to go beyond your monthly spending limit. This is an entirely different mental process. Over time, I believe it changes your relationship to money.
Your aim is to build a personal financial plan that enables you to:
• Meet your financial obligations (your bills)
• Pay off high-interest debt
• Build a savings and retirement account
• Pay for your life
• Meet your financial obligations (your bills)
• Pay off high-interest debt
• Build a savings and retirement account
• Pay for your life
If it's time for you to take the first steps and I can help!
If you're like me and you have big goals, and you want to spend every dollar towards those goals, you need a budgeting system like this, one that does not require you to be constantly vigilant about your finances. Instead, this plan limits your spending so you can meet your goals first.
Get started by downloading my free financial planning templates and get started with your financial planning!
Get this set of financial planning templates to get started on your budget journey!
Thank you this is a great post for how to budget and get debt paid down faster. I think the best advice I have recieved and follow is always pay yourself first.
Thanks, Wendy. And YES! Let’s all start paying OURSELVES first!
This is a way to think of budgeting and turn it’s on its head. It’s a such a simple way to flip your goals around to really see them as concrete things and how to do it. What great tips
Thanks, Hannah!
I have not heard of this concept. Worth looking into it. Thanks for sharing!
You’re welcome, Lina!
We’ve lived this concept all of our married life and it works!! We put 3 kids through college, took some awesome vacations around the world, paid off student loans and bought our house in 10 years. Every penny you make counts!!
Patti, this is amazing! Congrats on meeting all these financial goals.
I like the way the down to zero budget plan sounds. I cant wait to download the templates and see how it will work with our budget. I love saving money!
Who doesn’t love saving money! Thanks, Nicole. Let me know how it goes with the templates!
What are the 5 bank accounts you recommend everyone has?
I use a “spending” account, bill pay account, annual savings for costs that come up annually or semi-annually, and a savings account or two. It’s all covered in my course AND I help you automate it all!