Setting a budget can be the single best thing you do in order to fix your finances and make smart money decisions. There are a few different ways to structure your savings and spending and you need to choose the one that works best with your financial habits and your lifestyle. One option to consider that is successful for many is called a zero-based budget.
What is a Zero-Based Budget?
A zero-based budget is a budget in which you give every single dollar you make a job or a purpose. You budget all of the money that you earn, so you are left with zero dollars unaccounted for. The idea behind a zero-based budget is that you won’t have money leaks or unexpected expenses when all of your cash is accounted for and allocated to meet your goals.
You don’t need to budget every single dollar of your money to “responsible” endeavors such as debt repayment or saving. You will also budget for things like entertainment, and even for miscellaneous unexpected expenses that might crop up during the course of the month. The point is simply to know where every dollar is going so you can spend consciously.
Creating a Zero-Based Budget
Start by creating a list of all of your sources of income to determine exactly how much you have coming in. Most people create their budgets on a monthly basis, so you should include your entire monthly income including income from paychecks, self-employment income, child support or alimony and any other regular sources of money.
Once you have accounted for your monthly income, you get to allocate it. You’ll do this by creating different budget-line items for all of your spending. Typically, you should start by allocating cash towards things you need or have to spend money on – rent or mortgage payments, gas or transportation, car payments, and minimum debt payments.
You should also include spending for required but irregular expenses, such as groceries. Once you decide how much you want to spend, stick to it! For instance, you might decide you only want to allocate $400 a month to groceries. You should make every effort possible not to go above $400 a month. If you find you are consistently unable to meet your budget amount for a required irregular expense, you may need to increase the budget for that item and adjust other categories accordingly.
Once you have allocated money for all the necessary and required expense, you should set aside some money for savings as part of your budget. Most experts recommend you save between 10 to 20 percent of your income. Some of your savings should go towards things like a retirement account and perhaps a college fund for your kids. You should also be saving for other things as well, including building an emergency fund or saving for a house. You can – and should- even set aside savings accounts for things like car repairs, the inevitable new car purchase, a vacation fund or Christmas presents.
The next step is to include line items in your budget for all of the other things you want to buy each month. You may want to include a set amount of giving to charity and a set amount of money for entertainment, dining out or other purchases. Whatever it is you are buying each month should be in the budget and you should set an amount and stick to it.
Adding it All Up
Once you have included all of the items that you plan to spend money on each month, make sure this amount matches the total amount of income that you have coming in exactly. If you plan to spend more than you are earning each month, you’ll need to adjust some budget categories downward so you don’t have a shortfall. If you end up with cash left over after all of your allocated spending, you’ll need to budget more for savings or in some other category of your choosing.
By creating a zero-based budget, you can save and spend with confidence, knowing all of your money is working hard for you.