If you’ve never used a budget before, the idea of starting from scratch can be a scary one. The truth is, you wouldn’t be the first person to feel this way. It’s never too late to get started and it doesn’t have to be as complicated as you think!
So, if you’re looking to dive into the world of budgeting, improve your spending habits, and save more money, zero-based budgeting can help you along the way.
Today, we’re going to talk about what zero-based budgeting is and walk you through how to get started.
What is Zero-Based Budgeting?
Zero-based budgeting – which is also sometimes called a zero-sum budget – is a system that helps you keep track of every single dollar you have coming in and guides how you spend your money. It’s called zero-based budgeting because it forces you to make sure you’re accounting for all the money you have coming in, so at the end of the day, all your income has a job. What’s important here is what you do with the money you have coming in, which we’ll talk about later on.
This type of budget works differently than some of the other budgeting methods that we’ve covered in the past, like the:
With each of these, the goal is to cut back on spending to free up your income. If you follow a zero-based budget template, your main aim isn’t to cut back your spending, it’s more so to shift what you ultimately spend your money on. This could help you do things like pay down your personal line of credit, invest your money wisely, and contribute to your emergency savings fund.
How to Create a Zero-Based Budget
Here are some of the key steps you’ll need to go through in order to put together a zero-based budget.
1. Take Stock of Your Income
Every dollar you have coming should have a job to do, but you can’t start handing out jobs to your money without having a good idea of what your starting point is. Your income is what everything else in your budget is going to revolve around, so it’s important to give it your full attention.
To be clear, your total income can be made up of more than just the paycheck you get from your main job. It can also include things like child support, any government programs you may get money from, or money you earn through a side hustle. So, make sure you’re accounting for all the money coming in and be sure to work with whatever you end up making after taxes (and any other deductions that might come into play).
It might also be a good idea to calculate your income from a monthly perspective, as a lot of your expenses are going to need to be paid on monthly basis. This can help to simplify the budgeting process. If you need some help breaking down your salary into monthly chunks, you can use a net pay calculator to do the heaving lifting for you[1].
2. Look at Your Essential Expenses
Now it’s time to move onto your expenses. The goal here is to gain a better understanding of how you spend your money. Start by going over your essential expenses - the ones you NEED to cover. These are non-negotiable items you need to pay each month. These can be things like:
- Rent or mortgage payments
- Transportation costs
- Childcare
- Food
- Utility bills
- Insurance
- Minimum payments on your outstanding debts
Make sure to include anything that’s specific to your situation.
3. Consider your Debt and Savings
Once you have a clear idea of how much money you have coming in and what you’re spending on essential items, you should be able to figure out how much money you have left after you subtract your expenses from your income.
But what do you do with this money? For a lot of people, it’s a good idea to put the bulk of this money towards things like making additional contribution to your debt and savings. This could be for things like contributing to your emergency fund, saving for retirement, and more.
The specifics of what you prioritize is going to depend on your situation. If you have a lot of debt that’s at a high interest, it might be a good idea to focus on paying that down before putting a lot of money towards your savings. If you already have a set payment plan in place for your debt, then you could consider focusing more on savings.
4. Factor in Variable Expenses
By this point, you should know how much money you have coming in, how much you’re spending on essentials, and how much money is going towards important things like savings and additional debt payments. Now take this information and plug it into the following calculation:
Income - Essential Expenses - Additional Debt Payments/Savings = X
The number that you’re left with is the amount can spend on things that might not be essential but make the month a little easier to get through! This could be things like eating out, clothing, and general entertainment. These are important items to consider and to plan for. If they’re built into your budget, then you can spend money on them without the guilt. The goal of all budgeting is to make a clear plan and remove the emotional stress that comes with trying to make ends meet. If a dinner with your loved ones is built into the budget, then don't’ feel bad about that time out you spend together.
After you factored these things into your budget, you should be left with $0. If you feel like all your bases are covered and you still have some money left over, you can put more money towards your savings. If things went the other way in step 4 and you have a negative amount, you’ll probably need to reconsider cutting back on your non-essential spending. The key is to find a balance that works for you.
Find a Budgeting System that Works for You
Budgeting and saving money aren’t always the easiest tasks, and it can be little overwhelming to start from scratch. If you’re worried about overspending and want to gain more control over your finances, zero-based budgeting may help you get there. It can be an effective way to spend with intention and cut out any bad spending habits you might have.
Ultimately, your goal should be to find a budgeting system that works best for you. This may take a little effort and research on your part, but in the end, it’s well worth it if it helps you to work towards your financial goals!
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
