Zero-Based Budgeting and the Path to Financial Peace
This the second article in our "Getting Back to Financial Basics" series.
As I mentioned in the first blog post in this series, saving is key to getting control of your finances. The more you save, the more you will have. If you haven't done so already, you need start building an emergency fund of six months of living expenses.
Saving sounds like a simple thing to do, but many people find it a hard habit to embrace. But if there is a foundational component to growing wealth, this is it. You won't grow wealthy if you can't spend less than you make, save and invest the difference.
Embrace Zero-Based Budgeting
Of course, even simple to-do's like saving more of your income make a huge assumption: that you are living within your means, or spending less than you make. Tracking both your expenses and your income is key to making sure that you are spending less than your make. To help our clients do that, I promote a concept called zero-based budgeting. Here's how it works: You start by listing your income for the month, then you subtract all your monthly expenses and savings. The balance should always be zero.
If you have a mortgage payment, insurance premium, or save $1,000 or $10,000 per month, it should be listed as a line item on your budget, with the bottom line netting out to zero.
If you spend more than you make, then you will have a negative bottom line. This means you need to go back and trim expenses somewhere. Or you could increase your income to make up the difference.
Now comes the part that will make or break your ability to achieve wealth: discussing your budget with your spouse. This is really important. If you are married, you probably know this. If you and your spouse don't agree to and follow the budget, your days may be filled with arguments and frustration regarding money issues. In fact, the leading cause of divorce in North America is money fights. There are more verses in the Bible about money than about any other topic.
Tracking both expenses and income is the key to making sure that you are spending less than your make. [Tweet This]
Avoid Money Arguments and Achieve Financial Peace
Here are my suggestions for avoiding the arguments and bringing peace to your discussions over money.
- Have the person that enjoys budgeting do it. At Financial Peace University, we call this person the "Nerd." Let them update the budget each month and show exactly where you will both spend your money. Do this before the month begins.
- Hold a budget meeting. Print the budget so you can both look at it on the kitchen table. It is much easier to review a printed report than an Excel spreadsheet.
- Let the spouse who didn't create the budget review it and make changes. At Financial Peace University, we call this person the "Free Spirit." Here is the tough part—the Nerd must not talk for 15 minutes while the Free Spirit reviews the budget and makes changes. The Free Spirit may feel spending $1,000 on clothes is unacceptable, and that the number should be closer to $500, and golf gear should be $500 and not $1. This may be an over-the-top example, but the point is the Free Spirit gets to make changes and have some ownership over the budget.
- Limit the meeting to 17 minutes. A meeting that lasts any longer may cause the Free Spirit to check out.
- Hold this meeting monthly before the next month begins to review your budget and determine where you money will go. Do this every month for the rest of your life.
Not Married? Find an Accountability Partner
If you are single, taking control of your money can be harder. It's even harder if you are a single parent. You need a partner who will keep you accountable and meet with you each month to review your budget. This person may live near you or they could live across the country and meet with you by phone. Just email them your budget before the meeting so you are both looking at it while you have a phone call together.