Budgeting is the first step to ensuring your finances are in order. It allows you to track your income and expenses, so you can make informed decisions about your spending.
Zero-based budgeting, for example, is a great way to take control of your finances and make sure every dollar is accounted for. It can make your life easier by not having to worry about overspending or going into debt.
In this guide, we’ll cover everything you need to know about zero-based budgeting and how it works. So if you are looking to get started with zero-based budgeting, this is the guide for you!
A budget is not just a tool to track your spending, it is also a powerful tool to help you achieve your financial goals. Here are some of the key reasons why you should budget:
1. Helps you control unnecessary spending
Spending on unnecessary things like impulse buys can quickly add up and put a dent in your finances. With a budget, you can track your spending and identify areas where you can cut back. It will not only help you save money but also help you focus your spending on things that are more important to you.
2. Helps you save money
Budgeting can help you better monitor your finances and make informed decisions about your spending. This, in turn, can help you free up more money to save for things like retirement or a rainy day fund. Saving and investing money is one of the most important things you can do for your financial future.
3. Helps you pay off debt
If you are struggling with debt, budgeting can help you get a handle on your finances and develop a plan to pay off your debt. By understanding where your money is going, you can make changes to your spending habits and focus on paying off your debt. You can set up a budget that focuses on paying off your debt as quickly as possible.
4. Makes you more financially stable
Budgeting can help you become more financially stable by ensuring your income is greater than your expenses. People who don’t have a budget are more likely to live paycheck-to-paycheck and have a harder time weathering financial setbacks. When you follow a budget, you are less likely to experience financial difficulties as you will have a better handle on your finances.
5. Peace of mind
Managing finances is a headache in itself. When you don’t have a budget, it can be even more stressful. Budgeting can help give you peace of mind by taking the guesswork out of your finances. When you know where your money is going, you can relax and enjoy life without worrying about your finances.
What is zero-based budgeting?
Zero-based budgeting is a financial planning strategy that requires you to start from scratch each period such as a month or year, justifying every expense and figuring out how to allocate every dollar.
In simple words, zero-based budgeting is a method of budgeting where your income minus your expenses must equal zero. This means that every dollar you earn must be accounted for and allocated to specific expenses.
Zero-based budgeting is highly effective for individuals as well as businesses. It can be used to evaluate and eliminate needless expenses, maintain control of expenses, and focus on high-profit/saving opportunities.
To achieve the goals, an individual or organization needs to have a detailed plan of how much money it will make and how much money it will spend. This set of information can be used to track progress and make changes if needed to reach the desired outcomes.
A zero-based is highly effective in these scenarios as it provides a clear picture of where someone stands in terms of its finances.
How to get started with zero-based budgeting?
Now that we know what zero-based budgeting is, let’s take a look at how to get started with this financial planning strategy.
1. Allocate your monthly income
The first step in zero-based budgeting is to allocate your monthly income. You need to know exactly how much money you have coming in each month so that you can figure out where it will all go.
Start with your main source of income such as your salary or wages. Then, add in any other sources of income such as side hustles, investments, or government benefits. Once you have a clear picture of your total monthly income, you can move on to the next step.
2. Determine your essential expenses
The next step is to determine your essential expenses. These are the costs that you need to cover each month to maintain your quality of life.
Essential expenses include things like
• Transportation costs, etc.
You need to make sure that your essential expenses are covered each month before you start allocating money to other expenses.
3. Track your spending for a month
The next step is to track your spending for a month because this will give you a clear picture of where your money is going and where you can make changes. There are a few different ways to track your spending, for example, you can use a budgeting app, create a spreadsheet, or use a good old-fashioned pen and paper.
4. Subtract your expenses from your income to equal zero
Now that you have a clear picture of your income and expenses, it’s time to start zero-based budgeting. This means that you need to subtract your expenses from your income until they equal zero.
If you have some money left over after covering your expenses, you can allocate it to savings or investments. If you are short on cash, you need to find ways to cut back on your expenses. The ultimate goal is to have your income minus your expenses equal to zero,
5. Make changes as needed
And lastly, don’t forget to make changes as needed. Your income and expenses will change over time, so you need to adjust your budget accordingly. Make sure to review your budget regularly and make changes as needed. However, don’t get too caught up in the details, the goal is to have a general plan that you can follow each month.
Zero-based budgeting example
Let’s take a look at an example of zero-based budgeting in action.
Let’s say your monthly income is $5000 and you receive it from:
• Paycheck 1 = $2,000
• Paycheck 2 = $2,000
• Rental income = $500
• Side hustle = $500
So your total monthly income = $5,000
Your monthly expenses are as follows:
• Rent = $1,500
• Car payment = $450
• Insurance = $250
• Gas = $250
• Utilities = $300
• Phone bill = $150
• Food = $600
• Entertainment = $250
• Mislaniouse = $250
• Investment = $1,000
So your total monthly expenses are = $5,000
In this example, your income minus your expenses equal zero. This means that you are on track with your budget and are not overspending. However, if your income minus your expenses do not equal zero, then you need to make some changes.
If you are short on cash, you need to find ways to cut back on your expenses or increase your income. On the other hand, if you have money left over after covering your expenses, you can allocate it to savings or investments.
Zero-based budgeting is a financial planning strategy that can help you take control of your finances. The key is to make your income minus your expenses equal to zero. This means that you are not overspending or underspending each month. It’s a great way to put all your money to work so that you can reach your financial goals much more quickly.