Getting your finances under control is nearly impossible without using some method of budgeting. Although you may shy away from the idea of a budget, it is really just a plan for how you will use the money you earn, and it often includes a method to help you stick to your plan. You'll find many available budgeting methods, and it's up to you to pick one that makes sense to you, feels sustainable, and fits with your financial goals.
What is zero-based budgeting?
Zero-based budgeting starts with the premise that your income minus your expenses each month should equal zero. Most people know that you should not spend more money than you earn. But zero-based budgeting says that you should not spend less money than you earn either.
Every dollar that comes to you during the month should have a defined purpose, whether it is used to pay a bill, save up for a vacation, invest for retirement or buy new clothes. At the end of the month, you should have spent or saved each dollar you earned or received. To achieve this goal, you will need to create and stick to a budget (also known as a spending plan) that accounts for all your income and expenses in equal amounts.
Advantages of zero-based budgeting
- You feel the freedom of getting to assign each dollar you get each month for a specific purpose rather than just trying to cut back on everything as much as possible.
- When you account for each dollar, you do not have money "left over" at the end of the month that gets wasted on unplanned purchases.
- It is easy to create a new budget each month to plan for differences in spending throughout the year. For example, you can budget more for gifts in December and budget more for car insurance in the months when those payments are due.
- You can be intentional about building your savings or working on debt reduction by including these goals in your budget each month.
Steps to create a zero-based budget
- List all the after-tax income you expect to receive during the month from all sources. This might include your paychecks from work, additional income from side jobs, child support money received, or earnings from investments.
- List all of the ways you expect to spend your money during the month, each with a specific dollar amount. Start with your fixed expenses, like your house payment, car payment, and phone bill. Then list expenses you have more control to adjust, like your grocery spending, eating out, shopping, and buying gifts. Lastly, list other places you would like your money to go, like retirement accounts, charitable donations, building up your emergency savings, or making extra loan payments.
- Add up the totals for your income and your spending and compare the numbers. Adjust your spending plan until your income minus your spending equals zero. You could cut how much you allocate for things like shopping or savings if you need to reduce spending. Alternatively, if you discover you need to spend more, you could increase the amount you will spend on an extra loan payment.
- Decide how you will stick to your spending plan during the month. For a zero-based budget to work in practice, you must spend your money exactly where you are planning to spend it. In many cases, you will need to keep track of your spending during the month to make sure you are staying on target.
© Fintactix, LLC 2015