Reader Question: How Do I Budget with Last Month’s Income?

How Do I Budget with Last Month's Income - picture of checkbook, bill, and calculator

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Welcome back frugal fanatics! We’re so glad you’re here.

We get a lot of emails from readers asking questions about their specific situations. Of course, we love engaging with y’all and always try to answer each and every one of them.

Every once in a while, we come across a question we think could help the entire group, which is what happened when we received this email a few weeks ago. It comes from a reader named Georgia, and here is what she asks:

Hello Greg & Holly,

I really enjoy your blog, but I’m not sure that I am grasping the zero-sum base budget. How do I use what I made last month to fund this month? I’m missing something but I’m not sure what it is…Can you give me some enlightenment?

First of all, great question Georgia! Thanks for sending it. Your email hits straight at my heart.

Seriously guys, budgeting questions get me all kinds of excited!!! It means somebody is trying to change their life, so I’m more than happy to oblige. With that said, forward ho!

What is a Zero-Sum Budget?

Let’s begin this discussion by defining one of my favorite topics of all-time – the zero-sum budget. In my opinion, if you learn how to use a zero-sum budget properly, you can totally change the course of your entire life.

Note that I said your entire life, not just your financial life. I truly believe getting your finances under control leads to a happier, less stressful life. Quite frankly, it’s also a life filled with more options. That’s the reason we started this blog, and it’s the thing that keeps us going still today!

So, what is a zero-sum budget?

Whelp, a zero-sum budget – sometimes called a zero-based budget – is a budgeting method that seeks to balance the amount of income you earn each month with the total amount of money you save and spend. To put it another way, you “zero-out” your income with your savings and expenses. Here’s an easy formula for you to remember:

Income – Savings – Expenses = Zero

I don’t want to spend a lot of time explaining how to create a zero-sum budget since we’ve covered it in the past. (We dig into it even further in our new book, Zero Down Your Debt, hitting stores in January 2017). However, here are the basic steps:

  1. Create categories for all of your monthly bills.
  2. Take your monthly income and “spend” it into each category (including savings) until you’ve allocated all of your income for the month.
  3. When your income, expenses, and savings balance to zero, you’ve created a basic zero-sum budget.

Using Last Month’s Income

Most people create their budget based on the money they think is coming in. That has the potential to create problems due to income shortfalls. Ideally, you should try to base your budget on money you have already made. You want to base your budget on last month’s income.

By using last month’s income to budget, you eliminate almost all of the guessing. You already know exactly how much money you have to spend for the following month, which helps you avoid overspending. Even better, you’ve already got the money to pay for it, so you’re not scraping by to find a few extra bucks to pay the bills.

To do this effectively, use last month’s income to pay yourself a “salary” on the first of the month. This salary is based on your fixed and estimated expenses and should include just the money you need to live that month. Any money you don’t use goes directly into some type of savings plan.

See Also: Budgeting Basics – Using Last Month’s Income

By paying yourself a salary based on your ACTUAL expenses, you’re setting yourself up for budgeting success. Instead of having extra money in your account that might get wasted, you’ll have exactly what you need.

So, instead of guessing how much money you think you have at your disposal, using last month’s income helps you be more exact. This leads to fewer mistakes, increased savings, and more specificity. And since this method provides more success, it usually leads to people sticking with their budget for a longer period of time…which of course perpetuates more success!

How Do I Save a Month’s Income?

Naturally, this leads to the question, “How in the world do I save a whole month’s worth of income?”

The key is cutting your expenses to free up extra money. Take the money you save and put it in a separate “fund” for your one month nest egg.

See Also: How to Save Money – 52 Simple Ways to Save

Example Time!

Let’s look at an example. Suppose you earn $5,000 a month in take home pay. Your expenses equal $3,500 a month. That means you have $1,500 a month you can put toward saving a full month’s income. In just over 3 months, you should have enough saved to use your last month’s income to pay this month’s bills! Make sense?

Pro Tip: Saving your last month’s income is something that should be done above and beyond your emergency fund of 3 to 6 month’s expenses. If you already have your emergency fund in place, you’re good to start saving up for one month’s income. If not, start with your emergency fund first. Once you have it fully funded, move on to your one month’s income!

How to Use a Zero-Sum Budget Before You’ve Saved One Month’s Income

The fact is, most people who are new to budgeting don’t have a whole month’s income saved up when they start out. But, that doesn’t mean you should throw the zero-sum budget out with the bath water! In fact, the opposite is true. Using a zero-sum budget is an excellent way to stay deliberate with your savings goals!

The cool thing about a zero-sum budget is that you can use it even if you don’t have a full month’s worth of income saved up. Although it works best when you base it on money you have in hand, you can still use it when building that one-month buffer.

See Also: How to Budget – A Step-by-Step Guide that Actually Works

You probably have a good idea of how much you’re going to make each month; so, go with that! Use the same process and categories you would with any zero-sum budget, just substitute your estimated income for your actual income. Again, your income minus expenses and savings should equal zero. Any money you earn above and beyond what you’ve budgeted for should be squirreled away in your savings!

Tools for Budgeting

Being as exact as possible helps create an environment for budgeting success, and using your last month’s income is one of the best ways to ensure accuracy. You can also use tools – like Personal Captial’s free cash flow app – to help ensure you stay within your budget on a weekly basis.

Above all, we hope this piece helps clarify how you can use last month’s income to budget for this month’s expenses. If you have any questions, please feel free to shoot us an email or fire away in the comments below!

Do you base your budget on last month’s income? Have you been able to build a one-month buffer? Let us know below!

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  1. We are able to live on last month’s income most of the time (except the summer months when we do not teach so we draw from savings made thru the year). We cut our monthly expenses down as much as we could & have delayed purchases a month or so (or only made partial purchases instead of buying in bulk, etc.) to meet our budget.

    Living on last month’s income is the final rule in YNABs program & we accomplish it as much as possible. I also using Personal Capitals weekly spending tool, it’s the easiest of the free programs to use!

  2. I would suggest baby steps. I’m able to do this for mortgage by transfering half of the mortgage into a separate account every two weeks when we get paid, the next paycheck the other half and so on. Period, no excuses! This way we’ve managed to have next month’s mortgage already set aside and half of the following month’s as well. Awesome feeling. I’m working on getting all living expenses set up this way but hey baby steps.

  3. Hey Greg, really good description of the method, I can\’t wait to read it in your book!

    We don\’t do that exact method, but something like it. We put some money into savings immediately, then pay our expenses, then transfer what\’s left to savings too. Double savings!


  4. I’ve done this for a couple of years now and it’s very helpful. I also love Personal Capital. Makes life easier. Hope your reader is able to work things out. 🙂

  5. I\’ve built a three month buffer, and keep all the investments in a portfolio so they generate dividend income. Great way to explain controlling expenses to people though. Like the analogy of building up a buffer

  6. You have discussed a very valid point.Thanks.
    It actually happens that people create their budgets based on what is coming in or what they are expecting to earn.But,practically the budget should be based on what you have already earned i.e.last month’s income,as explained by you. By following this simple rule,it will become much easier to achieve our financial objectives. Reducing our expenses or looking for a source of passive income can further help to meet our financial goals.

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