Do you want to make the most of your income? A zero-based budget assigns a job to every dollar you bring home. Imagine not having to really think about what you’re going to do with your money. Imagine living within your means and being financially successful. Let’s take a closer look at how to create a zero-based budget.
Track Your Expenses for Two Months
You want to track your expenses for at least two months. This will give you an idea of how much money you spend and what you spend it on. It’s important to do this step. Many people think they don’t spend as much as they really do (those little expenses can add up quickly!). This will be an eye-opening experience.
Consider Your Income
How much do you make each month? Do you make enough to cover your current spending habits? If so, you’re ready to move on to the next step. If not, you need to think about what you can cut to make your budget work.
Add Up Expenses
You want to add up all of your expenses, including bills, savings, etc. This includes seasonal expenses. Many people forget about those big expenses that happen once a year. For example, property taxes are a yearly expense. For these seasonal expenses, divide by 12 to determine how much you need to save each month for these expenses (which you can put into a sinking fund).
Rework as Needed
You want your income and expenses to equal out. This means that once you deduct your expenses from your income, it will equal zero. If the numbers don’t zero out, you’ll need to rework the numbers to make it happen. You might need to earn more money or cut your expenses.
If you find that you have a lot of money left in your income after expenses (which hopefully you do), you need to determine the best way to use the leftover funds. If you have debt, allot more money to getting out of debt. If you’re out of debt, put more money into savings.
A zero-based budget helps ensure that you’re not spending your money frivolously or living above your means. When each dollar is assigned to a job, you’re making the most of your money.
This doesn’t mean you have to stop having fun. You can include fun money as part of your expenses. In fact, financial experts state that you should definitely give yourself some fun money to help yourself stick to a budget. The amount of fun money in your budget will be based on your other expenses. Even if it’s just a tiny fraction of your budget, it will help you stay on track.