Once you are past Mayday Clear and current on all your bills, it’s time to narrow in on developing a zero-based budget. Our second WayPoint is labeled Zero In. This is where you narrow in on your target and create discipline that will lead you toward developing a workable and usable balanced budget. There are only four data points used in budgets: 1. Monthly take home pay; 2. Fixed expenses; 3. Variable expenses; and the one that most don’t factor into their plan that causes the greatest disruption – 4. Periodic expenses. Monthly take home pay is a finite and usually fixed amount. Without a pay raise, a bonus or a change in deductions, this amount is fairly easy to calculate. Fixed expenses are rarely adjustable, so they are easily transferred to a budget worksheet with minimal thought. Variable expenses can either be discretionary or non-discretionary. When developing a zero-based budget, you will want to minimize the discretionary expenses (non-essential purchases) so more cash is available for that particular WayPoint you are working on. Periodic expenses are those expenses that occur only on a periodic bases. Once again, these expenses can be discretionary or non-discretionary. Some typical examples of Periodic expenses are: water/sewage bill, car insurance, gift purchases, vacations, lawn care, etc. To properly prepare a monthly budget, we teach our clients how to pre-plan all the periodic expenses and turn them into a fixed monthly expense. For example, if you plan on taking a vacation in 10 months and your planned vacation expense is $2,500, you will want to set aside $250 a month to cover that future expense. If your water bill comes every three months and let’s say it’s $120, you should set aside $40 a month to cover the expense when it comes due. The key to a zero-based budget is to give every dollar a name and have it allocated to the categories that apply to your specific needs.
This Waypoint is so crucial and it forces people to realistically look at where their takehome pay goes. By giving every dollar a name there is a built in sense of accountability. With every dollar being allocated to one of the four data points, there is also less of a chance for money to be spent frivolously.