Not sure where your money is going? Zero-based budgeting is a method of managing money in which you “zero out” all income and expenses. The goal is for your income minus expenses to equal zero each month. In this case, your expenses also include money you allocate to save or pay off debt. Also known as zero-sum budgeting, this strategy requires that you give every dollar of income a purpose. Read on to find out how to make a zero-based budget in just 4 easy steps.
This budgeting technique is helpful for many people who are unsure of how they’re spending their money and want to gain more control over their finances. According to surveys by Dave Ramsey, people who use a zero-based budget pay off 19% more debt and save 18% more money than people who don’t use this strategy.
Before we get started, you’ll need to choose how you’ll make a zero-based budget, using a spreadsheet, an app or pen and paper. We made an easy to use spreadsheet which you can download here and fill in as we go through the steps or print it out if you prefer – but you’ll have to do some math if you don’t use the spreadsheet on a computer or phone.
1. Record Your Monthly Income
First start by recording your monthly income. This includes your take-home pay from any jobs as well as any side businesses. In the spreadsheet you can find the above section on the Income tab. The spreadsheet currently has some sample data in it, so you should change the sources and amounts based on your income. Avoid changing anything highlighted in gray as this is a formula.
2. Track Your Monthly Expenses
Next you should evaluate the last month or 2 of your expenses. Record these in the Expenses tab in order to estimate for the next month. First start with fixed expenses which are consistent each month, like rent/mortgage, car insurance and regular credit installment payments, such as for a car or other loan. Then move on to variable expenses, like groceries. These expenses will change month to month, so you’ll have to do this part every month. This may sound tedious but it will give you more control over your hard earned money. Don’t forget to allocate money toward your savings. Be sure to include a miscellaneous category for small, unexpected expenses that do not require you to touch your savings. Also consider seasonal expenses, like holiday shopping, insurance premiums or vacations, so you can set aside a small amount each month.
3. Income – Expenses = Zero
In the spreadsheet to the right of the expenses, you’ll notice your monthly income and expenses totaled and the “Amount Left.” This is the amount after subtracting your expenses from your income. Remember the goal of zero-based budgeting is to have $0 left – this does not mean that you have no money in your savings or checking account. This means that each dollar is either used to pay for something or pay yourself, such as in a savings account, retirement fund or to pay off debt. If you have entered all of your expenses and you have a negative number in Amount Left, don’t panic. You’ll either have to find a way to make extra income or cut some expenses (or both). Find out ways to cut costs by reading our article, 9 Ways You’re Losing Money Without Even Realizing It.
4. Evaluate Your Spending
The first time you fill out this spreadsheet you will be estimating your expenses based on your spending in previous months. Now at the end of the month, you’ll have to see how you did! Change your expenses to reflect the actual amounts rather than the estimates. If you have money left then allocate it to paying off debt or your savings.
By giving each dollar of income a purpose, you are able to be more mindful of your spending. For some people, this can be truly liberating to finally have control over their money. Try zero-based budgeting for a couple of months – it could be the budgeting strategy that will enable you to achieve your financial goals.
Remember that a budget is only as effective as you make it.
Tie The Zero-Based Budget In With A Savings Plan
If you have a financial goal that you are saving for or want to save for, then use the zero-based budget in conjunction with your savings plan. A savings plan helps you determine how much you need to save and for how long. Find out How To Make A Savings Plan For A Big Purchase and then add the amount you need to save each month to your expenses and you can allocate any extra money left at the end of the month to that savings.
Other Budgeting Strategies
This method may be too time consuming or detail oriented for you and that’s okay. There are many other budgeting strategies that you can try if this one didn’t work for you. Read our article, 3 Simple Budgeting Techniques To Improve Your Finances to learn more about the 50/30/20 budget, 80/20 budget and the separate bank account budget.
There are also apps that can simplify the budgeting process when you connect your bank accounts or enter each transaction as well as your income. We picked our 5 favorite budgeting apps, which you can check out in this article, Top 5 Budgeting Apps To Help You Manage Your Money.
Financial freedom begins with good habits.Rebecca & Tiago, theloadedpig.com