Creating A Zero Based Budget For Financial Success
We all know that budgeting is the key to financial success but understandably many of us shy away from budgeting because we either find it boring or time-consuming to set up. However, the benefits of a personal budget can never be overemphasized. It can be a great help if you are paying down debt, buying a house, saving for college, bulking up your nest egg or just trying to exert control over your finances. But, even financial experts agree that the best way to budget is the one that you are most likely to stick to. So, the most perfectly crafted budget is worthless unless we follow it.
It is really difficult to say which type of budgeting approach works better than the other, as we all have different perspectives and habits to overcome. But, one of the best types of budget that has proven to work well, be more effective and help people save money is zero-budgeting. This type of budgeting is easy to learn and the basics could be understood easily.
What is zero-based budgeting?
Dave is a big supporter of zero-based budgeting as he is against the widespread dependence on credit cards. It is a core belief that he has instilled in his financial advice. Simply put the concept of zero-based budgeting is one in which you take your income and then allocate money for different budget categories till there is nothing left or you “zero-out”. This does not mean that you should spend every dollar you earn, but it means that any surplus will go towards a specific goal. You may see it as zero-sum budgeting or abbreviated as ZZB.All these terms work on the principle that every dollar you earn has to be spent according to the plan you create.
Here are 5 simple steps to help you create a zero-based budget and improve your financial future.
How to Create a Zero-Based Budget
It may take you a few hours to set up your first zero-based budget, but you will find it going faster in the succeeding months. Many categories will slide smoothly in the coming months, especially if your income is regular.
- Step 1: Choose Your Tools: The first step is to determine the tools you will use to create your budget. It is recommended that you keep things as simple as possible. You can use a spreadsheet, pencil and paper, or budgeting software. You should not spend too much time here and pick something that you are comfortable with to list your income and expenses and do some simple math calculations.
- Step 2: Figure out your income after tax: A good budget always starts with knowing what comes in every month. The easiest way to figure this out is to have a rundown and include all your month to month earnings and make a note of the aggregate.You should also input your pre-tax and after-tax income in your spreadsheet. But if you have a variable income you must estimate your income as best as you can and then budget at the low end of your estimate. Lastly,be sure to include even the small sources of income like child support or side jobs.
- Step 3: List your expenses: The third step is to start tracking every single dollar expense you plan to have in the upcoming month. This may seem a daunting task. To make this easy you can follow the following strategy. First, make a list of categories. For example, going out to dinner can be categorized as “entertainment” and gas as “transportation”. This will be helpful even for those with fluctuating income. If you have any trouble deciding on any particular category you can review your bank statements for the past few previous months. Now list each expense and calculate the amount as well. Your list should include everything you spend in a month like a mortgage, car payments,utilities, fuel, groceries, restaurants,and entertainment.You should also remember to include the money you are setting aside for 401K, 403B, or any other investments and savings.
Step 4: Adjust to zero: The fourth step is to subtract your expenses from income and make sure your total is zero. Unfortunately, it will take a while to balance this budget. Here is what you do with the difference.
If your income exceeds your expenses then that is good.You can save for your future like starting an emergency fund, paying down debt, saving for retirement, or saving for a large expense.
But if your expenses exceed your income then this will probably be the most difficult step for you. You will have to move things around to make your zero-budget plan work. You will have to see which expenses you can delete or where you can add income when possible. You can start with luxury items first like shopping, coffee shops, eating out, or online services. You can also get creative by foregoing the pricey takeout and making your meals at home or bringing down your utility bills by saving electricity.
If you are stressed out during the process, you should remember your goal- you are working to build a better financial future.
- Step 5: Save It and Review It: The fifth and final step in creating a zero-based budget is to save it and review it. You must keep the budget where it is readily accessible. It can be copied on your phone, hanging it on the fridge, on your computer desktop, or just carrying it in your wallet. Then you should stick to your budget by reviewing it regularly throughout the month so that you can make the necessary adjustments.
You should be determined and not give up because the longer you work with a zero-based budget the better you can understand where and how to spend your money. You will be more financially organized and can save for an emergency-fund that can help you when you may not have much coming into your bank account.
Zero-based budgeting is such a valuable tool that even many businesses and large corporations use it on a much larger scale to improve their cost-efficiency.