Dear Dave,

What exactly is a zero-based budget?

Dean

Dear Dean,

Simply put, a zero-based budget is income minus outgo equals zero. If you earn $4,000 a month, and you’re doing a zero-based budget, every item you spend, save, give and invest should add up to $4,000. It’s a method of knowing where every single one of your dollars is going. Most people don’t live on a budget. They just cash checks, write checks, then they look up and wonder where all their money went. Not having a plan, especially for your money, is a bad plan.

List all your income from all sources for the month. Next, list every single expense you have each month. Rent, food, cable, phones, and anything else you pay for gets added to the list. Your expenses vary from one month to the next, which is why you make a new spending plan each month.

Now, here’s where it gets real. Subtract your income from your expenses. Ideally, this number will be zero. It might take some practice, so don’t be discouraged if everything doesn’t balance out perfectly the first few times. All that means is you need to find a way to bring one of the numbers up, the other one down—or both. But whatever you do, don’t spend a dime that’s not accounted for.

If you have a problem with spending more than you make, make some cuts in order to equalize your income and your outgo. Using coupons, cutting back on groceries, or carpooling to work are great ideas to reduce spending. If you want to generate more money, get a second job on weekends or sell some stuff.

You’re the boss of the budget—in the beginning. Once it’s committed to paper, in a spreadsheet, or on an app like EveryDollar, the budget is the boss!

—Dave

* Dave Ramsey is a seven-time #1 national best-selling author, personal finance expert, and host of The Dave Ramsey Show, heard by more than 16 million listeners each week. He has appeared on Good Morning America, CBS This Morning, Today Show, Fox News, CNN, Fox Business, and many more. Since 1992, Dave has helped people regain control of their money, build wealth and enhance their lives. He also serves as CEO for Ramsey Solutions.