Zero Based Budgeting
When you get paid, it can be easy to fixate on the necessities like housing and groceries then spend the rest of your earnings. But doing so can hurt the possibilities to reach both short-term goals such as a vacation or long-term goals like retirement that may be years or even decades away. Zero-based budgeting constrains you to think about those goals when looking for a place for your extra cash each month. Setting up a zero-based budget starts with adding up your income and evaluating, categorizing, and prioritizing your expenses.
Does it seem like you spend your paycheck quickly? Do you want to have more money for savings, debt payoff or long-term goals? Since you’ll see exactly how much money you have at the end of the month, you can designate it to the purchase of a car, your own home, or eliminating debt. Your take-home pay and goals will look much different from someone else’s, and zero-based budgeting accounts for that. Organizing your money can help you save more. Instead of seeing “extra” cash as spending money, give it a job to help you spend less and save more.
Think of all the different income sources you could put in the plus column of your budget. You could look at your W-2, past paychecks, and bank statements showing deposit amounts. Review your recent spending history to identify your expenses, including your housing costs, utilities, groceries, and debt payments. Estimate how much you plan to spend on other expenses over the next month, such as dining out or on gifts and giving. Give yourself a miscellaneous category so you’ve got a little extra cushion in your spending.
Then you subtract all those expenses from your income and it should equal zero. If the result isn’t $0, adjust your budget. Perhaps this means lowering the amount of money you set aside for long-term goals or making a debt payment beyond the minimum (if your plan allows). If you made more money than you expected, assign it to one or more specific categories until you hit zero. You might consider adding it to your savings in order to build up your emergency fund. If you end with a negative balance, that could mean cutting expenses in at least one category. For example, if your water bill is higher one month, you may decide to cook at home more instead of going out to eat.
Not everyone has a steady income. Some people work an hourly job with a changing schedule, so their paycheck is different every time. Others receive commission, and their income depends on whether they make a sale. To calculate an irregular income, it’s a good idea to add the least amount made at each job for a conservative estimate so you’re not short at the end of the month. You could also consider a money-tracking app to keep track of income and expenses.
Just because you put a plan in place doesn’t mean it can’t change as your life does. In the summer you may want to spend extra with friends and activities, and that may require decreasing the budget line for savings that month. Being flexible means you’re more likely to stick to your budget. Always review your progress. Everyone makes mistakes when it comes to budgeting, but those lessons learned can help you put a better plan into place for the next month. Take a few minutes at the end of each month to reflect on how well your budget fits your life and goals, and consider what you may want to change going forward.
