Learning how to be intentional with your money is key when you want to achieve a goal like lifestyle freedom, and that starts with budgeting. I highly recommend zero-based budgeting, which means you allocate every dollar of income each month to an expense or goal.
If you’re not sure how to get started with a zero-based budget, this is the episode for you.
Lightly edited transcript appears after the show notes.
Topics we explore
- why budgeting is important
- an overview of zero-based budgeting
- how to create your budget using my free budget template
Resources mentioned
Lifestyle Freedom Starter Guide: https://www.rhothomas.com/start
Free budget template: https://www.rhothomas.com/budget
Wealthyesque, Episode 7: https://www.rhothomas.com/budgeting-for-lifestyle-freedom-and-financial-independence/
Strategy session: https://www.rhothomas.com/coaching
Work with me
Schedule a one-hour strategy session at https://www.rhothomas.com/coaching
Connect with me
The Wealthyesque Community: https://www.rhothomas.com/community
Social media: Instagram, Facebook, Twitter, and LinkedIn
Email: hello@rhothomas.com
Lightly Edited Transcript
Hey friend. Welcome back to another episode of Wealthyesque.
I’m super excited you’re here, and as always, I appreciate you taking time out of your day to spend with me.
Before we get into today’s topic, I want to ask you to do me a favor. If you haven’t already, please take a second and leave a written review for the podcast.
Reviews are super important because they tell potential listeners and the podcast platforms, especially Apple Podcasts if you’re on an iPhone, that this show is worth listening to. Just think about when you’re buying something on Amazon.
Do you go with the option with 2 reviews? No. We’re looking for the one with the most reviews right? Same deal here, so if you could take two seconds and leave a review, I’d really appreciate it.
So anyway, moving to today’s topic, we’re going to talk about budgeting. When you want more control in your life, one of the first things you want to think about is your budget.
My favorite budgeting method is the zero-based budget. This is the method I actually use and the one I recommend.
I have a free budget template that you can download at rhothomas.com/budget, and it’s designed for zero-based budgeting. Some of you have messaged me wondering if you’re using the template correctly, so we’re going to walk through how to use it today.
If you haven’t already gotten yours, it would be helpful for you to have for this episode: rhothomas.com/budget.
Okay, so to give you a roadmap of where we’re going, we’re going to go through:
- Why budgeting is important
- An overview of zero-based budgeting and
- Walk through the budget template
Why budgeting is important
A lot of people dislike budgeting because they feel like budgets are restrictive, and they want to have the freedom to spend their money how they want to.
But your budget doesn’t have to be restrictive. A budget is simply a plan for how you’re going to spend your money, and you make the rules. You get to decide what’s in your budget and what you’re going to spend in your different categories. There’s no one-size-fits-all budget that works for everyone.
Basically, your budget is your guide for how you’re going to spend your money. As I mentioned, it’s one of the first things you need to think about when you want to take back control of your time.
When you get into higher income levels, not having a budget doesn’t necessarily mean that you’re at risk of not eating or not having a roof over your head or anything like that.
The main thing I see with people at higher income levels is that you end up spending all of your money and having nothing to show for the money you’re bringing in.
A budget helps you make sure you have some money left over for yourself, and it also helps you set your priorities.
When you create a budget, you can make sure that you’re intentionally allocating your money in line with your values and goals. You can make progress toward the life you want because you’re creating some space in your finances.
You’re not living paycheck to paycheck. You’re becoming less dependent on your income from your job because you’re able to reduce your expenses by paying down debt, or you’re able to increase your savings.
All that to say your budget is super important when you’re talking about a goal like lifestyle freedom, taking back control of your time, living life on your own terms.
Zero-based budgeting
Switching gears, let’s talk about zero-based budgeting.
Zero-based budgeting is a budgeting method where you allocate every dollar of income that comes in each month. When you subtract your expenses from your income, it should equal zero.
And that’s not to say that you have $0 in your account. You can keep a buffer in your account so you’re not getting so close to that line, but when you have money coming in, you want to give every one of those dollars something to do.
Each dollar will go toward an expense, your savings, paying off your debt, any other goals you have. That’s the point of zero-based budgeting. You make sure that you are balancing out your income and expenses.
As I mentioned, this is the budgeting method I actually use and the one I recommend, but if you want to learn about other types of budgeting methods, head back to episode 7 where we first talked about budgeting and went through an overview of the different methods available.
I first offered this free budget template with that episode and forgot to mention it in the actual episode. But I put it in the show notes, and I also mentioned it a few times on Instagram when I shared the episode (my handle is @iamrhothomas if you’re not following me over there yet).
If you missed the budget template the first time, just head to rhothomas.com/budget to download it. And even if you already have it, I rearranged some categories and added a few categories, such as a catch-all category for Amazon purchases, that may be useful for you, so you might want to download it again. It will be helpful for you as we get into the next part of our conversation.
So some of you have been wondering if you’re using the budget template correctly, so I figured I would walk you through it, so you better understand how zero-based budgeting works because it can be tricky.
How to create a budget using the budget template
Looking now at the budget template, you’ll see that there’s a column for your budgeted income and expenses. Before the month begins, this is where you put how much you think you’re going to bring in and spend during the month.
There’s also a column for your actual income and expenses, which is where you put the actual amounts you brought in and spent at the end of the month.
There’s a column showing the difference between what you budgeted and what actually happened, so you can easily see where you brought in more or less money than expected or where you spent more or less than you expected.
And finally, there’s a column for you to make any notes about particular line items. For example, when we have income beyond our normal monthly income, we put it in a line item called “other income” and in the notes, we write what it is like if it’s a reimbursement or a tax refund or whatever it is because we want to be able to look back and see where all our income came from.
Budgeted income
So the top section of the budget is for your income, and there’s a column for your budgeted income—the amount you anticipate you’re going to bring in when you’re creating your budget before the month begins—and a column for the actual income you brought in when you’re looking back at the end of the month.
We’re going to start with the budgeted column.
By the way, all the colored boxes in the template auto-populate, so you don’t need to do anything with any of those.
But in the income section, there are a few different rows here for multiple jobs and for other income. I did that because you could have a number of different ways you bring in income.
For example, my husband moonlighted during residency, so I had my primary job (really my only job); he had his primary job; and then we also had income from his second job coming in.
The “other income” rows are for non-job-related income. Things like child support, tax refunds, reimbursements.
It really doesn’t matter what you label anything in this section. We actually label ours with the source of the income, so instead of “Job 1” and “Job 2,” our budget has our employer names, and we have just one catch-all line item called “other income” for any miscellaneous income because we don’t have any recurring monthly miscellaneous income that it would make sense to label separately.
The point is you want to make sure that all of the money coming into your household that month is accounted for in your budget. You do your budget monthly, and the money coming in can change.
For example, at tax refund time, you may have more income to work with than during a random month in the middle of the year. Or if your gross salary is over the FICA limit, which is $137,700 in 2020, then your income over this amount is exempt from social security taxes, so you’ll see a spike in your paychecks in the later months of the year.
You adjust your budget for these changes. With the FICA example, you might not know exactly how your paycheck will change, so you could just set your budgeted income based on your previous paychecks because at the end of the month, you’ll look at the actual income you received and allocate any additional dollars above what you budgeted.
But once you put in all of your income, the colored box at the bottom of the budgeted column is going to have the total amount of income that you anticipate bringing in. If you’re looking at the budget template, it’s cell B8 that will have the amount of income you estimate for the month.
Budgeted expenses
Then, you go down to the expenses section, and you put in all of your expenses for the month. The template includes common expenses, but feel free to add or delete rows if you need to.
For example, if you don’t have kids, you don’t need line items for kids and childcare and can delete those. But on the other hand, there’s only one line item for a car loan, one for student loans, and one for credit card, so if you have multiple loans or multiple credit cards, you want to add additional rows for those additional expenses.
By the way, we did our student loans by servicer. Although I had 14 different loans, they were all with the same servicer. Since I paid one monthly payment to that one servicer, we had one line item for my student loans.
If you do add additional rows, the colored cells at the end of those rows in column D won’t auto-populate until you copy the formula into them. Basically, if you add a row, go to the row above the one you added, copy what’s in column D, and paste it into column D in your new row.
So anyway, once you put in all your expenses, you’re going to get a total in the colored box at the bottom of the budgeted expenses column. If you’re looking at the budget template before you add or delete any rows, it’s cell B45 that will auto-populate with the total of your expenses.
You want cell B8, your total budgeted income, and cell B45, your total budgeted expenses, to be the same number. That is what zero-based budgeting is. If those two numbers are the same, it means I’ve allocated every dollar I anticipate coming in this month.
And it doesn’t mean that every dollar is going to an expense necessarily. The expenses section includes tithes. It includes savings in there. We’ve got charity. You’ve got a line item for an extra debt payment. There’s a miscellaneous section for things that might come up unexpectedly, or even things that come up expectedly, if that’s a word.
We use our miscellaneous column for things like birthdays, where we know we’re going to spend a little bit more that month, but it’s not a recurring monthly expense, so we don’t have a line item in there every month for birthdays.
I know different people handle that differently. Some prefer to include a line item for birthdays every month. Do what works best for you.
Now, if your total budgeted income and total budgeted expenses are not the same number, ideally, your expenses number would be the lower of the two, which means you just have more money that you need to allocate. So let’s say for example, your budgeted income is $8000 for the month, and your budgeted expenses are $6000 for the month.
That extra $2000 you’ve got hanging out there can be put toward whatever you want. So if you’re trying to pay off your debt, you can put that $2000 into the extra debt payment box. If you want to bump up your savings, you can put it into the savings box. If you want to divide it up across multiple categories, you can do that.
The point is that once you add that $2000 to the expense section, your income and expenses sections will balance out, and the total income and total expenses numbers will be the same.
If your total budgeted expenses are higher than your budgeted income, this is good to know, too. This means you need to look at the expense categories and see if there’s anywhere you can cut back and adjust your numbers accordingly.
Again, you could cut from just one category, or you can cut across multiple categories. At the end, though, you need to get your total expenses number to match your total income.
Overview of actual income and expenses
So now we’ve created our budget for the month. Let’s fast forward to the end of the month and look at the actual column.
This is what actually happened during the month, and you want to track it over the course of the month, at least until you get your bearings and have a good handle on your budget.
You don’t want to look at what you actually brought in and spent for the first time at the end of the month because if it’s not lining up the way you expected, you’ll be thinking, “Oh I shouldn’t have spent this” or “I should have done that,” but you can’t go back and fix it at that point.
Some people look at their spending each week so that they know exactly where they are and can make changes as necessary. It’s a good way to stay on top of your money when you’re first starting out with your budget.
Actual income
But looking back at the budget template, we’re going to start with income again. The budgeted column includes what you expected to bring in based on your paychecks and any additional money you expected from other sources. Now go back through and put the actual amounts you received in the actual column.
Let’s say you got a reimbursement that you weren’t expecting. You would put that in the actual column for “other income,” and in the notes section, you could put it was a reimbursement of $X for a work conference you paid for, for example.
Whatever actual income you received, put that in the “actual” column. Then, the “difference” column will show you any difference between what you expected and what you actually received for each income source, as well as any difference between the total income you expected for the month and the total income you actually received.
Actual expenses
Then, go through your expenses and do the same thing.
Look at your actual spending for the month and categorize it in the actual column for each category.
One thing that I added to the template, as I mentioned at the top, is a category for Amazon, just a catch-all category, because Amazon is such a large part of many of our lives, and it can be difficult to go back through and break out what you bought on Amazon into these different categories. Having a catch-all category for Amazon hopefully makes that a bit more convenient.
And you very well could decide you don’t want the catch-all category, and you want to know exactly how much you’re spending in each individual category. I feel you. My husband and I actually don’t use a separate catch-all Amazon category. We go through and look at what we spent on Amazon and put it in the individual categories.
But even if you decide to keep the Amazon catch-all category, having it will still show you if you’re spending thousands of dollars a month at Amazon, which I have seen happen. If you see that, then maybe you decide you want to stop.
That’s the point, right? For you to know what you’re actually spending your money on.
Then, column D tells you the difference between what you expected and what actually happened for both your income and your expenses.
On the income side, it’s going to show you where you didn’t get as much money as you thought you were going to or where you got more money than you thought you were going to. On the expenses side, it will show you where you spent more than you planned to in a particular category or where you spent less.
Either way, when you get to your actual total income, which is cell C8, and your actual total expenses, which is cell C45, you want them to match just like when we were talking about the budgeted side.
We’re still doing a zero-based budget so when we’re looking at our actual income that came in, we still want it to match our actual expenses.
When you overspend in a category, you want to make sure that you pull that money from another category to keep your budget balanced. This goes back to the importance of keeping up with your spending throughout the month because you don’t want to get to the end of the month and find that you overspent in a bunch of categories and actually spent more money than you brought in.
It also goes back to what I was talking about with you being in control of your budget because you get to choose what you spend on and how much. If you decide that you want to ball out on clothes, maybe you’re going to cut back on personal care stuff. Or if you decide that you want to put more on your debt, maybe you decide that you’re going to spend less on entertainment.
You make those trade-offs, and it’s based on your priorities and what’s important to you. But if you aren’t looking at this stuff, if you don’t have it written out, and you don’t know what your numbers are, then you can’t make those trade-offs intentionally.
The whole point is to be intentional with our money, so that we can make intentional decisions for our lives in line with our values, goals, and priorities.
The difference column
Okay, so the final point, looking at the difference column, if your budgeted income and your budgeted expenses were the same number, and your actual income and your actual expenses were the same number, then in column D your difference for the income and expenses, cells D8 and D45, should also be the same number.
As I mentioned before, if you add rows make sure you copy the formula in column D into your new row so that it will auto-populate.
I hope that was helpful for you and helps you set your budget up more easily. If you need personal help with your budget, grab a strategy session with me. We can go over your goals and your numbers and come up with something that works for you.
I helped one of my clients find $4000 in her monthly budget that she was then able to allocate toward her goals, which also gave her a lot more flexibility with her employment situation. Obviously, I can’t guarantee any particular results, but if you need help, head to rhothomas.com/coaching to schedule a session, and we’ll get you together.
Let’s recap:
1. A budget is not restrictive. You make the budget. You set the rules. You set the parameters around what you’re willing to spend and what you are not going to spend.
2. There is no one-size-fits-all budget. What works for one family may not work for another family and that’s okay. Personal finance is personal.
3. A zero-based budget simply means that you allocate every dollar that you bring in each month to an expense, a goal, something, so that your income equals your expenses.
4. The main goal is to be able to make intentional decisions for your life in line with what you value. You can’t make those decisions and make intentional trade-offs with your money, if you don’t know what your numbers are and where your money is going.
5. My free budget template will help you get started with your zero-based budget. Head to rhothomas.com/budget to pick that up. And if you need personalized help, let’s do a strategy session, which you can schedule at rhothomas.com/coaching.
That’s it for this week’s episode. Meet me over in our private Facebook community, The Wealthyesque Community, and let’s talk about any questions or thoughts you may have about zero-based budgeting.
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As we close out friend, I pray that you will take some time to get clarity on your values, goals, and priorities.
I pray that you will go through your numbers and set up a budget that aligns with those values, goals, and priorities and moves you toward the life you want to live.
And as always, I pray that you will continue to take steps to regain control of your time, build wealth, and live the life of freedom and choice you deserve.
Talk to you later.
Hi, I’m Rho! I’m a wife, mom, and Biglaw associate who believes that true wealth is having control of your time. I help busy lawyers like you take back control of your time by teaching you how to achieve lifestyle freedom through mindset shifts and financial independence. Read a little more about me here.