Budgeting is one of the most important facets of everyday financial literacy that allows you to keep track of spending in a responsible and efficient manner. But what many people don’t know is that there are quite a few budgeting methods available. One of these methods, zero-based budgeting, offers unique benefits and can help you secure financial stability. Here’s how zero-based budgeting works and how to create one so you can start managing your expenses more effectively.
What is zero-based budgeting?
Zero-based budgeting is a technique that assigns every dollar earned a destination, whether that’s savings, expenses, or entertainment. It’s a budgeting method used by companies, but it can also come in handy for individuals and families.
The zero-based budget is different from strategies like the “80/20” strategy, where 20% of your income goes towards general savings and 80% goes towards general spending. Instead, zero-based budgets allocate specified amounts of money toward clearly defined activities or purchases.
How can I create a zero-based budget?
Here are the steps you can take to create a zero-based budget:
Calculate your net income
To begin, make sure to calculate your net income, not your gross income. This will allow you to plan for the money that actually ends up in your bank account after taxes and insurance. With a zero-based budget, you will find a location to put every single dollar from your take-home income.
Track your expenses
The next step in a zero-based budget is to compare your expenses against your net income. Break down your expenses into specific line items, such as utilities, car payments, dining, and groceries. This comparison will allow you to get a broader picture of your spending habits, but it will also allow to move onto the next step: distributing your income.
Distribute your income
Once you’ve added up your expenses and your net income, you can now make decisions about how much you want to allocate to specific expenses and tasks. While you do have some freedom in this step, it’s a good idea to start with important expenses, such as rent, utilities, and groceries. Then, take a look at debt payments, emergency savings, and other moderate priorities. After these expenses are accounted for, you can move on to other types of savings and entertainment.
The bottom line
Zero-based budgeting is a great way to better plan your spending. This method allows you to understand where your money is going so you can optimize your expenses. By using the zero-based budget in your day-to-day life, you can earn more financial flexibility and set yourself up for achieving short-term and long-term goals.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.