How to Make a Zero-Based Budget in Excel

So you’ve reached the age where you want to stop paying off someone else’s mortgage and buy your first home. Or maybe you’re planning an epic multi-country trip to explore exotic destinations.

Or maybe you want to retire early at age 55 or 45 instead of in your sixties. Maybe you want all of the above! To achieve these very doable goals, you need to set a budget, and a zero-based budget is the easiest to set up.

What is zero-based budgeting?

A zero-based budgeting is a method of budgeting that requires you to allocate all of your monthly income to specified expense categories until you have zero dollars left over. By creating a zero-based budget, you “assign” all of your money in ways that align with the things that matter most to you.

Do not get me wrong; There are many other useful Excel templates that can help you manage your money. But many people agree that zero-based budgeting is the simplest personal budget you can create to hold yourself accountable.

How to Create a Zero-Based Budget

Here is an example of a complete zero-based budget. Don’t worry; You’ll be able to follow each step so you can make one for yourself.

1. List monthly income

Your after-tax monthly income is the amount you have to work with. We’ll use $4,000 for illustrative purposes. You can do more or less than this, and that’s perfectly fine. You can update your income in the spreadsheet as your circumstances change. For example, as inflation rises, you may learn to ask for a pay raise.

In the example above, you can see that the amount of $4,000 is typed in cell C3.

2. List essential expenses

Your mandatory monthly expenses include all non-discretionary expenses. This includes any expenses you have no choice but to pay, such as rent, internet, utilities and insurance (if insurance is required where you live).

These costs generally remain the same from month to month. If you have mandatory expenses that occur annually, you can divide them by 12 to figure out what you will spend throughout the year and factor these expenses into your monthly budget.

Like your income, these expenses can change over time. For example, you can use one of these websites to find a cheap apartment to rent. However, at this point, you just need to start tracking how much you’re currently spending in each category of your life.

To complete this step, add a row for the total amount spent each month on nonessential expenses using the SUM function.

3. List Variable Expenses

Variable expenses include all non-discretionary expenses. This means any expense over which you have some control. Of course, things like food are inevitable, but you can control how much you spend on food. These costs typically vary from month to month, or they may occur once every two months. Put your list of variable expenses one or two lines below your nonessential expenses.

You’ll need to choose category names for your variable expenses and set some spending goals. In the example above, eight categories are included, but you can have twenty or more. Try to keep the number of categories between 10 and 15 so that you have fewer categories to allocate your expenses to later.

Plus, you can adjust the goals each month, so don’t worry if you’ve never tracked your spending. After the first month of tracking, you’ll begin to better understand where your money goes, and you can update the goals in subsequent months.

To complete this step, add a row for the total amount spent each month on variable expenses using the SUM function.

4. Subtract expenses from income equal to zero

Now we need to add a few lines so that we can subtract your total budgeted expenses (mandatory and variable expenses combined) from your budgeted income. This is where the budget template gets its name—the budget balance must equal zero.

If you find that your budget balance is positive, it means you have extra dollars to assign to one of your spending categories. Here you get to choose how your money works for you. Would you like to spend this extra income on dining out or save for the down payment on a new home? Remember, the goal is to give every dollar a job so that you can spend the money on what you want most out of life.

If you find that your budget balance is negative, it means that you are spending more than you are earning. If this is the case, you will end up in debt if you don’t change the amount you spend or if you don’t increase your income.

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