Your Money Deserves Better

🔍 Deep Dive: The Most Effective Budgeting Method

Zero-Based Budgeting

I’m a big believer in zero-based budgeting (a.k.a. envelope budgeting). This originated from an old fashioned budgeting technique called “cash stuffing,” in which people would set aside physical cash in paper envelopes, with each envelope labeled for a specific purpose such as “Rent” or “Groceries”.

Envelope budgeting is the most effective budgeting methodology, by far (and today there are ways to do this through apps and software, so you don’t need to hang on to physical cash).

Here’s why it works so well:

• It ensures every dollar you earn and spend is accounted for and organized into virtual “envelopes”.

• It handles overspending and underspending from month to month in a natural way, and doesn’t require complicated systems for tracking monthly rollover amounts.

• The amount of money you have “available to spend” at any given point in time is determined by how much money you actually have today, and not based on arbitrary spending thresholds.

…and here’s what people typically do without envelope budgeting:

• Let all of their money flow into one bank account.

• They say “okay, I’ve got $1,000” right now (or however much you have).

• Then look at their account balance periodically and do some mental math to ensure they can cover the next big expense like rent without overdrawing their account.

This is a problem for 3 reasons—and here’s how zero-based budgeting solves it.

1. The “Mental Accounting” Problem

You’re out at the mall and see the pair of shoes you’ve been eyeing on sale. You open your bank account, see you’ve got $3,000 left and wonder, “Can I afford to buy these?”

There you are, in the moment, trying to figure out:

• $3,000 minus rent which hits next week…

• Then minus another $350 for utilities…

• And then…oh yeah! I need to set aside $500 ish to fix my car next week…

It’s a lot of mental math and gymnastics to do in a moment’s notice.

And it can lead to a lot of accidental overspending.

The fix: Assign every 👏 single 👏 dollar 👏 you earn to a virtual “envelope” in a zero-based budgeting system.

Then, you know exactly how much you have available to spend on that cool new pair of shoes, because you’ve already set the money aside and you know you can afford it.

This gives you a clear understanding of where every dollar can be spent, how much you’ve spent so far, and how much you have left to spend.

You can use a spreadsheet to track your income and expenses, but that’s a lot of work and can be prone to error. Or, soon you can use Refresh.me 😏 which will handle the hard parts for you.

2. The “Cash Flow” Problem

Traditional budgeting often treats each month as an isolated unit. At the beginning of each month, your spending targets reset no matter how much you earned or spent during the previous month.

But what happens when you overspend or underspend in a category? Or when you receive an unexpected bonus from work?

Most traditional budgeting methods assume steady, predictable income and expenses.

But that isn’t the reality of life for most people.

Zero-based budgeting works with the money you have available now—not what you expect to have later. Overspending, underspending, and changes in your income are automatically built-in to the way zero-based budgeting works.

This prevents the cycle of early-month confidence followed by end-of-month remorse.

3. The “Purpose” Problem

You work hard for what you earn. And your money should work hard for you in return.

But it can’t without a clear purpose.

What do I mean by this?

In a zero-based budget, you allocate every single dollar you earn to a category—whether it’s rent, groceries, savings, debt, travel, or anything else. This ensures that there’s not excess money just sitting in your account doing nothing for you.

How to Put it Into Practice

Set aside 30 minutes to add up all the money you have today in accounts that you use for day-to-day spending.

Then create a list of categories for every expense and financial goal you have. Categories can be split up however you’d like, but typically are separated into buckets like Rent, Groceries, Utilities, Subscriptions, etc.

Next, assign every dollar you have into an expense category until you have $0 left to allocate. Afterwards, the money you see in each category is the money you have to spend.

Then, every time you spend money you can subtract the expense amount from the category you spent it on - and every time you make money, you can allocate that new income into a category. And that’s it!

Don’t worry about getting it perfect—the goal is to gain some clarity, not to get it 100% right on your first try.

🤔 WWYD: A 27-year old teacher from California

Let’s look at this “real people budget” (via InspiredBudget on TikTok), break it down, and test your knowledge.

The basics:

• Who: 27-year old teacher

• Where: California

• How much: $4,500 of monthly income after taxes

Her current goal is to pay down debt, so she’s living at home to save money.

Here’s what her budget looks like:

This leaves her with $1,226 per month leftover.

Let me know what you would do with that money.

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