What is a Zero-Based Budget?
on Topics: Budgeting
If you’re looking for ways to improve your financial health, you are probably well-aware that following a budget is step one. But there is more than one way to budget your money and with the time commitment budgeting can take, it is important to find the method that works best for you.
If you are the kind of person that likes to have a plan, check off boxes as you go, and see a completed list, then a 0-based budget might be the right strategy for you. Read on to learn what this strategy entails and how it can help you.
Every penny has a purpose
A zero-based budget is about balancing your income with your expenses so that you have zero dollars remaining at the end of your budget period. This means that every penny that comes in must go back out.
Simply put, this is a financial strategy that involves giving every single dollar in your paycheck a “home.” As a result, once you’ve allocated all of your funds to essential bills and savings, you should have a “0” balance.
The balance takes commitment
Sticking to zero-based budgeting takes dedication because you must carefully track your spending to make sure every dollar goes where it must. In creating your 0-based budget, you must allocate all your income toward your expenses, debt payments, and savings. There is no such thing as “play money” leftover. You must tell every dollar where to go and make sure it gets there.
It will save you money and lower your debt
Providing a strict financial spending plan, a 0-based budget will help you save money and pay off your debts quicker by preventing frivolous spending, overspending, and waste. Every dollar you earn is carefully tracked for a specific purpose: expenses, debt payments, or savings. Variable expenses or unexpected costs or earnings you did not budget for can throw off your numbers. Rollover any extra money into savings or debt payments for a quick boost in your financial health.
Creating a 0-based budget is not hard
However, sticking to it can be difficult if you are not committed. To get started, track your expenses for a few months. Categorize your expenses and know how your income is allocated toward those expenses. Any income that is not needed to cover expenses should go into savings. This can be a general emergency savings fund, or it can be split between an emergency savings fund and travel fund, or other appropriate savings tool. The key to creating the 0-based budget is to make sure everything balances out to zero at the end of each budgeting period. Your income minus your expenses and savings deposit should equal zero every time.
You can still spend money
You determine how your expenses are categorized. If you want to budget for wants and needs, that is your decision. Your budget is yours and should be built to fit your life. So, whether you create specific expense categories like gas, groceries, and utilities or you keep it generic with bills, recreation, and food, as long as your budget is balanced at the end, you can benefit from a 0-based budget.
Remember, while you may commit to a budget, the numbers in your budget may change. It is okay to revisit your budget regularly and adjust the numbers to meet your needs to accommodate unexpected changes in your cash flow. If you need help budgeting or want to learn more strategies to improve your financial health, contact a financial planner today.