There are various systems for managing your money if you want to get serious about your finances. You must test out different options until you find a method that works for you so that you can stay committed to your financial goals for the long run. If you’re looking for a new budgeting strategy, you may want to consider a zero-based budget, as many people have finally gotten control of their spending by using this plan.
Here’s a look at a zero-based budget and why it might be right for you.
What’s a Zero-Based Budget?
If you haven’t heard of a zero-based budget or if you’re uncertain of how it works, here’s the simplest definition from personal finance expert Rachel Cruze: “Create and follow a zero-based budget, which is your income minus expenses (including giving and saving) equals zero… Once you’re on a budget, you can focus on your four walls first, (shelter, food, utilities and transportation), then start looking at where you can find margin.”
Every dollar you earn should have a purpose or a specific task, from being deposited into a savings account to paying your cell phone bill. The goal is to figure out how to ensure that you get to zero by planning at the start of the month. It’s important to note that zero doesn’t mean you have no money in your savings account. The goal is to have your income minus your expenses total zero. You should always try to give yourself a buffer of at least $100.
How To Create a Zero-Based Budget
Now that you know what a zero-based budget is, it’s time to make your own. Here are the steps for creating your first zero-based budget:
- List out all of your monthly income. This is all the money you have coming in from your full-time job and any side hustles you might be involved in.
- Write out all of your expenses. This section will include charitable donations, savings goals, essential expenses (food, utilities, shelter and commute), other essential items (insurance, debt payments, etc.) and extras (entertainment and going out).
- Subtract your total expenses from your total income until it reaches zero. If this figure — income minus expenses — doesn’t reach zero the first time, it’s alright. You could increase your savings to ensure the figure does, or move some other numbers around.
It’s essential that you plan at the start of the month, because your spending could vary depending on the time of the year — holidays or special events — and you could have a unique expenses popup, like an annual insurance payment.
Why Does a Zero-Based Budget Work Well?
Every single style of budgeting and managing money has its unique strengths.
Here are five reasons why a zero-based budget might be right for you:
- Your money has a purpose. The main reason that a zero-based budget works well is that you’ve assigned a job for every dollar, so you can’t deviate from it, because then you’re going to go below zero. When you know where your money’s going, it’s easy to stay motivated.
- It helps with financial worries. If you worry about your finances or stress about spending, it will help you to use this budgeting method to see where your money is going.
- You’re held accountable. You’re on the hook when you create this budget, because you’ve set up your plan at the beginning of the month. This plan ensures that you reach zero, so you’ll be accountable to yourself.
- You have to manage your spending. When you have an exact plan for your money, you have to adjust your spending and keep it in check so you don’t go below the zero figure you set. Many people new to budgeting are in for a reality check when they see how much they spend frivolously on items that they never needed in the first place.
- It’s easy to adjust. If you have any significant expenses or foresee your income increasing, it’s easy to adjust this budget, as you can move the numbers around until they reach zero again. Since you set the budget at the beginning of the month, you can have a clear picture of your spending. It’s just essential that you leave a realistic amount for savings and entertainment spending so that you’re not shocked when you see that you went below zero.
Who Does a Zero-Based Budget Work Well For?
Personal finance is personal, and it’s vital that you find advice that suits your lifestyle. Here are the people who would do well with a zero-based budget.
Someone On a Tight Budget
If you’re on a tight budget, you will want to have a clear game plan that you can stick to. With the zero-based budget, you’re assigning a role to every dollar that you earn so that you can track your finances better. You’ll also know where you stand at the beginning of the month so that you won’t have to stress about your bills.
Those Looking To Control Their Spending
If your spending has been out of control lately, you may want to monitor it until you can stabilize it. With this budgeting strategy, you have a system that dictates your spending so that you’re limited in how much you can spend on miscellaneous items.
Someone Saving Up for a Major Purchase
If you’re saving up for a home down payment or getting married shortly, you will want to create a clear financial plan to help you get there. With this budgeting system, you can plan for your savings goals by setting a clear target every month so that you’ll know where you stand in advance.
Experts have stated many times that the best budget is the one you can stick to for the long run. You won’t know if a zero-based budget works for you until you try it. This could be the system that finally helps you gain control of your spending habits.
More From GOBankingRates