Zero-Based Budgeting Explained with Zero Headaches
During all this craziness over the past few years, filled with uncertainty and uncontrollable situations, people have been trying to find something that they can have control over. Some people have chosen to control their diet and fitness - learning how to cook and finding ways to keep active despite closures of some gyms and public areas - while others have been turning to their finances. If you want to take back control of your life, then learning how to budget and control your finances is a great way to do just that.
No matter what stage in life you are at, it is never too late to discover budgeting. And trust me, budgeting will change your life. Whether you are interested in saving money for a special event - like a wedding or nice vacation - or just want to find a way to make end's meet without struggling and living hand to mouth, then budgeting can help you. You can even build a budget on a low income!
Don't get me wrong, budgeting isn't necessarily easy. It does take some time and planning, but it gets easier over time -- especially once you have your own template or spreadsheet created. That being said, don't get discouraged! While there are some effective budget management skills everyone should know, there are many places to turn to for help, including finance books (for beginners or experts) and personal finance apps. Just make sure that you educate yourself on the budgeting basics first, and with these under your belt - as well as some patience - you will be sure to succeed!
What Is Zero-Based Budgeting And How To Make It
You have probably heard about zero-based budgeting, but you may still not know how it works. (If you haven't heard of zero-based budgeting yet, then you should definitely look into it; even the Air Force uses zero-based budgeting!)
Zero-based budgeting, also known as zero-sum budgeting, follows a pretty simple premise. As Lauren Greutman, a professional debt coach explains, "Zero-based budgeting is when you give every dollar, every cent, a purpose throughout the month." While this does mean that the sum of your budget at the end of the month will be zero - suggested by the name - this does not mean that you will have just spent every penny that you earned. Rather, it means you have consciously allocated this money to some specific purpose, whether it is towards your expenses or towards your savings - or ideally both.
One of the great things about the zero-based budget is the peace of mind it allows you to have, even - or especially - if you live on a tight budget. By taking control and allocating every penny, you can ensure that you will have enough money for everything that will come up in the month. You will no longer have to lay in bed worrying about affording your end-of-month expenses because you will have already allocated the money to do so.
Another reason why this budget is so great is that it does not focus on cutting your spending, which many budgets do require. Instead of focusing on cutting your spending, zero-based budgeting is "about funneling your spending toward your highest priorities". When you prioritize your money, you can spend your money on what you want and what you need. The important thing is to identify your priorities and then pay off your priorities first.
How Do You Make a Zero-Based Budget?
If you have never made a budget before, you may be surprised to hear that you can begin making a zero-based budget by following the same first few steps that you need for any type of budget. Follow these 4 simple steps to make your zero-based budget:
- Gather Your Financial Information
Before you can create any budget, you have to find out what money you are dealing with. Collect all of the information on your fixed and variable income and fixed and variable expenses. Collect everything. The best way to do this is to create a budget spreadsheet, which will make it much easier to organize yourself. I personally like to keep a spreadsheet with multiple sheets. The first sheet contains my income and expenses, as well as the income and expenses of my partner, including our bank account balances and the payment information of my student loans, including the total sum I owe on each loan as well as how much I owe on each loan per month (and what day that payment is due). Then I have another sheet for each month, where I input my variable expenses, such as how much I spend on groceries, how much I spend on eating out, and how much I spend on "extras", like going to the movies or going out with friends. This helps me organize my spending, while keeping a snapshot of my budget on its own sheet.
Fixed income will be your regular monthly income from work, as well any child support you may receive or any money you make from a side job, while variable income will be any money you receive that you do not receive every month, such as birthday or Christmas money.
Fixed expenses will be your regular monthly expenses that do not change (or do not change much), such as rent, utilities, and your phone bills. Variable expenses include groceries, gas, and anything else you regularly spend money on each month and are dependent on your lifestyle. - Negotiate Your Bills
While some expenses are fixed, some expenses may actually be negotiable. Instead of just cutting out TV or internet expenses that seem like a drain on your monthly expenses, try to negotiate your bills. You'd be surprised how often just calling and asking can get you a lower interest rate or fewer fees.
- Make Your Budget Sum To Zero
The whole point of the zero-based budget is to make the sum of your budget zero. In other words, your income minus your expenses needs to equal zero. This does not necessarily mean spending every penny you earn. Rather it means allocate every penny you earn. This is so important. Think about it, when you have some money leftover after paying your bills, what do you do with it? You probably think of this money as exactly that: leftover and free to use. This budget will help you stop spending money as frivolously, since it will require you to put those pennies to use: towards your bills/needs, and then the rest allocated towards saving, investing, and finally your wants.
You may say, "Well, my income minus my expenses is only $6. Is that okay? Isn't that close enough?" No, it's not close enough! If you have even $1 left over, then you need to allocate it to something! You don't have to necessarily spend it on a pack of gum or a lottery ticket just to get rid of it; you can always just allocate it towards your savings. It does not matter how you allocate, since what is right for someone else may not be right for you. This is why you need to know your own priorities, so that you can decide what is best for you and your personal financial goals. - Track Your Spending/Follow Your Budget
It doesn't really help to make a budget if you don't actually follow it. Now that you have done the planning, it is time to put your budget into action. Track your spending! Make sure that how much you spend - and how - follows the zero-based budget that you created. If it doesn't work out perfectly the first month, that's okay! Now you will know what works and what doesn't work, so you can create a more realistic budget for yourself.
Can You Make a Zero-Based Budget With an Irregular Income?
Yes, you can! If you have restricted hours at work and thus don't make as much per month or maybe you are a freelancer with an irregular income, then you may worry sometimes if your income will last you through the month. But even with such an irregular income, zero-based budgeting works really well! You will just have to set up your budget a bit differently.
Instead of calculating to zero with your fixed income, you should do so with a low-earning average. The important thing is that your budget sum ends up being zero! Even in the case that your income is even lower than expected one month, you should be fine: Remember, this is where your prioritization is so important! Since you prioritized your expenses, just spend your actual income on the essentials, and cut out the less essential expenses. Dave Ramsey also has more advice on how to create a zero-based budget with an irregular income that could be beneficial for you.
Why Should You Even Use a Zero-Based Budget?
If you want more control over your personal finances, then making a budget should be your first step. The zero-based budget is especially helpful if you want to stop throwing money away on nonessentials. When your money - "every penny" - has a specific purpose, then you are less likely to waste it. The zero-based budget also allows you flexibility, since it does not tell you what percentage to spend, save, or invest, like some budgets do.
It doesn't matter if you are trying to get out of debt, save up for a big occasion like a dream wedding or vacation, or just want to set up a safety net - so that you don't end up needing to use a personal loan for an emergency, like a personal medical loan to help get you back on your feet. No matter where you are at in life, it is always a good idea to have a budget.
Reach Financial Freedom. Budget and Save Your Money Easily.
Who Can Benefit Most From Zero-Based Budgeting?
Maybe you! If you are someone interested in achieving your financial goals but need more flexibility than most budgets out there allow, then the zero-based budget could help you. While some budgets focus on cutting expenses and showing you how to stop spending money you don't have, the zero-based budget lets you choose what to spend your money on. The most important thing in any budget is of course to pay off your fixed expenses and needs first, but the zero-based budget let's you choose the rest.
Types Of Budgets
Once you have made the decision to start budgeting, your first task will be determining what type of budget is right for you. While you can get the three types of budgets explained in 3 minutes, here is a quick summary of the three main types of budgets.
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The planning budget, as it sounds, is used for the purpose of planning ahead for a big purchase - like buying a home or a car, or for a special occasion like a wedding. When using a planning budget, the most important thing is to set your goal. It is extremely important that you know what you are working towards in a planning budget. Once you have your goal in mind, you can better set priorities and see where you could cut back in your expenses. It may be difficult at first to determine which expenses are necessities and which aren't, but you will get the hang of it with some practice! Maybe you will have to make coffee at home instead of buying coffee out every morning, or maybe you need to cook a few more meals a week versus just buying food out at a restaurant. It is easier to make small concessions in your daily expenses than you may first realize.
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If you have found a problem area in your spending, then you should consider using the problem solving budget! This budget requires some self-awareness, as you need to be aware of what areas you overspend in before you are actually able to cut back in those areas. For instance, if you enjoy going to the movies, then you can probably fit that into your budget every once in a while, but if you know you are overspending in this area - like going to the movies three times a week and always buying popcorn, soda, and candy at the concession stand - then you may have a problem.
Don't cut out everything you love from your budget, just be self-aware and use the method of moderation. If you were to cut out everything you enjoy spending money on - like going out with friends or getting fast food - then your budget may not be realistic for you and will thus be close to impossible to actually follow.
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If you are not saving up for something specific or do not have any clear problem areas of overspending, then you may prefer the comprehensive budget. Just as it sounds, the comprehensive budget is more comprehensive, which means it will require more time and more work. But the great thing is that, once you have your ideal budget down on paper - or typed into Excel, possibly with equations put in that will calculate everything for you - then you will not have to recreate this comprehensive budget every month, or even every year. You will only need to adjust your comprehensive budget when/if you decide that you have different financial goals.
While you may constantly lean on your comprehensive budget for the first few weeks or first few months, while you are getting used to it, it may be something you can relax over time. It's just like starting a new diet. When you first start a new diet, you might count every carb, every calorie, every gram of protein, etc., but after a few weeks, once you know what living with these boundaries looks like and how it feels, then you can better rely on feel versus exact counting. That is not to say that you should not continue to track your finances after a few weeks or months, rather that you will not have to constantly focus on the inflow and outflow as much as when you first begin the new process. It really does get easier over time.
Conclusion
If you have been looking for a budget that is right for you, look no further! The zero-based budget is easy to follow and will put the control of your finances back into your hands - where it belongs! Don't wait any longer. You deserve to meet your financial goals, and when better to begin than today?