Dave doesn’t really include this as an official baby step, but it can, for a lot of people, be much more difficult to accomplish than any of the seven official baby steps.
The concept is simple: write down all of your income for the month and then start listing and subtracting your expenses until the bottom-line equals $0.00. This is called a zero-based budget.
The hard part comes in (1) prioritizing your expenses, (2) figuring out how much to assign to a category, and (3) handling variable or periodic incomes and expenses.
Prioritizing Expenses
Listening to Dave’s radio show, it shocks me to hear how many people pay their credit cards and luxury expenses before they pay their home mortgage! Talk about some screwed up priorities!
Dave tells people to place these five items at the top of their budget:
- Food
- Clothing
- Utilities
- Transportation
- Housing
Until those five categories are paid, no other expenses get paid.
Funding Your Categories
Another issue is knowing how much money to assign to each category. This part takes time to get right. My wife are still adjusting our budget 5 months after starting our budgeting. The easiest thing to do is to look back through your bank records and assign your transactions to categories. From there you can cut back your spending to fit your budget.
A great web site that can help with this process is Mint.com. Once you sign up for a free account and you input your bank account information, Mint will download your transaction history and categorize your transactions for you. It also has per category budgeting functions to help keep you on target. It can even send you text message alerts when you bust a budget category.
Here’s a screenshot from the Mint.com front page showing an example of how your spending is categorized and graphed:
Handling Variable and/or Periodic Income and Expenses
Real troubles start when you have to deal with variables of income and expenses.
I’ll be honest and tell you that I’ve never had to deal with variable income, so I can’t get personal advice on that. But, if I were in your shoes, what I would try to do is to budget based upon a minimum income. If your income is never less than $2,000 per month, then try to budget with that income by funding your expense categories based upon priority. Some items at the bottom of the budget might not get funded… but at least you have food on the table and a roof over it all. If you are lucky, though, all of your categories might end up getting funded. By doing it this way, any extra income you get that month can go straight onto your debt.
Variable expenses are much easier to deal with than variable income. There are at least two types of expenses that fall into this category and they are all handled differently.
1. Monthly expenses that vary from month to month. Utility bills, fuel costs, etc. With these items, I like to budget for an annual maximum. Then at the end of the month, any cash left in that category gets dumped straight onto debt. For example, if my electric bill comes in at $350 during the hottest month of the summer, I’ll try to budget $350 per month every month. Then, in the spring and fall when the bill probably doesn’t even break $200, that’s an extra $150 per month to throw on debt!
2. Annual or quarterly expenses. Insurance payments, property taxes, annual memberships, etc. These items, with luck, are somewhat fixed or their annual increase is predictable (3% more per year, for example). The easiest and, probably, safest way to handle these is to divide them into monthly payments and set that amount aside into a savings account each month. Then, by the time the expense is due, you have the cash sitting aside ready to go. Another way to handle these, in cases where you get additional lump sums of cash (annual bonus, commissions, etc) is to set aside the full amount when a lump sum comes in. This method is a bit more risky depending on the dependability of that extra cash flow.
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Jan 14, 2009 
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