One of the problems with our previous budget was the inability to budget down to zero. We had categories with a set amount to spend, but there wasn’t a good way to deal with being over-budget or under-budget in a category and we were never quite sure how much we had leftover that we could put toward debt. I am in love with the way we are able to give every dollar a job now and put the maximum amount toward our student loan debt.
I want to show you how our we budget every penny at the beginning of the month and how it works for us. I will walk you through how we budgeted (our actual budget) for May.
We are “living on last month’s income,” which means that when paychecks and other income come in during the month, we earmark it to be used the following month. Then, at the beginning of the new month, we know exactly how much money we have to work with that month.
In order to live on last month’s income, you will need a buffer of a month’s-worth of expenses. It may take several months of saving or using your tax return or other chunk of money to get into a position to live on last month’s income. It is worth every effort! There is so much peace of mind that comes when you aren’t living paycheck to paycheck, making sure to time the credit card payments just right so that nothing bounces.
Update: I have since written a detailed explanation on how and why we live on last month’s income.
Beginning of the Month
At the start of May, we had $3,795.95 to budget, which was all of our income during the month of April. Our ready-to-budget income is slightly higher than what I reported as our earnings during April. When I calculate and report our earnings each month, I report the net income from online sales (fees and shipping taken out), but the ready-to-budget income for the month includes payments I receive from Etsy and Ebay, before fees and/or shipping are taken out of them, since fees and shipping are one of the budgeted categories.
Allotting Money to Categories
This is the fun budget-y part! We go through the categories, starting with the most important ones.
In May, we pay tithing of 10% of what we earned in April. We have always paid tithing, but we’ve scheduled it differently in the past. With the way we do it now, we know exactly how much it will be since we pay on last month’s income, so there isn’t any guessing.
- Fixed Monthly Bills–
These are bills that have the same amount due each month. They require no guesswork. For us, health insurance, car insurance, cell phone, and our dental discount plan all fall into this category.
- Everyday Expenses-
These are the categories where most of the action happens during the month. The categories we use are gas, groceries, clothing, household, and fun.
- Business Expenses–
Someday, we might have our own business budgets, but for now they are a part of our family budget. Our business categories include various category types.
- Some of these are fixed–For example, the law practice expense of $44.10 each month for law practice management software is the same each month.
- Some are variable but known— I know at the beginning of the month what I will owe in Etsy fees since my Etsy bill is calculated on the previous month’s sales and postage I purchased through Etsy.
- Some are very variable–For example we budgeted a guesstimate under Lawyer Marketing because my husband is hosting a seminar and we aren’t sure what the total cost will be. Other months, this category just includes a print ad.
- Some are just their own thing— Since my husband often makes purchases for work or scouts or church that he is reimbursed for, I keep a category to track those purchases. It should zero out by the end of the month.
- Periodic Expenses-
We think through the month and budget forany periodic expenses that are coming up that month, like car registration renewal, life insurance premiums, birthdays, medical bills, or car repair. If we weren’t in a total debt repayment mode, most of these would be sink funds, where we would allot a certain amount to them each month so that when the planned periodic bill came up the money would all be there ready to go.
You’ll notice that there are no credit card bills on my list. Once you get going on YNAB you don’t have to worry about where the money is going to come from to pay your current credit card bills because all the purchases made on your credit card are accounted for in your categories. The money to pay the bills is just chilling in our checking account. I don’t worry about it accidentally getting spent because we always spend according to our categories in YNAB (not the balance of the checking account).
When you start YNAB, your credit cards will each have their own category (called “pre-YNAB debt) until you pay off the balance that was already on the card. New purchases after starting YNAB will not add to that credit card category because they are accounted for in their actual category like “clothing” or “groceries.”
Allotting Money to Debt
After allotting money to all our categories in May, we had $1,726.63 that we could potentially put toward debt in May. We didn’t want to pay every last penny on the first of the month though, because there are still thirty more days where unexpected expenses could pop up.
We like to pay a big lump toward debt at the beginning of the month,but leave another chunk in a holding tank category until the end of the month. Usually we pay a round-ish number, but we were pretty close to getting one of our debts paid off, so our debt payment at the beginning of May was $1,459.38. The remaining $267.25 is in our hold tank creatively titled “End of the Month Payment.”
When we go over budget on a category (accidentally or intentionally), our first line of defense is to adjust the budget in other categories. For example, if it looks like we are going to be over on gas, I will subtract from our clothing budget and add it to the gas budget. If an unexpected expense comes up (like bad news at my dentist appointment this month), then I will have to get the funds from the “End of the Month Payment” category. Anything beyond that will be taken from the Emergency Fund (and later repaid).
A few notes on debt: We are in an unusual position right now that we don’t have any minimum payments due. If you have minimum payments, make sure that you are paying at least the minimum due on those. That should be high in the priority list when allotting your money into categories. If you have multiple debts, they should each have their own category. Since all of our debt is student loans, we keep the debt category to just these two categories.
At the End of the Month
At the end of the month, there is usually some money remaining in the “everyday expenses” categories since we don’t spend exactly $300 on groceries or exactly $500 on gas. I add whatever is remaining in each category at the end of the month to the “End of the Month Payment” category. When the balance of each category is zero, I make a debt payment for the amount of the “End of the Month Payment” category.
Update: I have since written a detailed post about this: Maximizing Our Debt Repayment at the End of the Month
The exception is the cell phone category. Instead of sending my dad a check for $20 each month, I let that category accumulate for a while before I send a check. This month it will be up to $100, so I will probably send off a check. If I weren’t trying to get every possible penny put toward debt, I could let the extra money in a category “roll” into the next month’s budget.
You can do it too!
You don’t have to have YNAB’s software to make a budget like this work, though it is convenient and motivating. You could set up something on your own if you like. It’s no secret that I am a do-it-yourself penny pincher, but even so YNAB has been worth every penny. You can try it free for 34 days. Be sure to check out YNAB’s amazing live online classes so you can make the most of your trial.
However you do it, budgeting down to zero can have amazing results. Zero-based budgeting will let you take charge of exactly where each dollar goes, so not a single dollar disappears. Have you noticed how they tend to disappear if you don’t watch them closely?