Zero-based budgeting involves creating a new budget from your base template every month, rather than just adjusting your previous budget. It’s gained popularity in recent years, particularly among those who have variable incomes. Even if you have a pretty steady income and expenses, zero-based budgeting can be a great way to maximize your savings, get the most out of your individual tax returns, avoid frivolous purchases, and invest in your financial future.
In the following sections, we will deliver five of the most important steps you should take to make zero-based budgeting work for you.
1. Track your spending for a few months
It’s impossible to create a workable zero-based budget if you have no idea what you’re currently spending from month to month. So, your first step is to track your expenses for a couple of months to get a gauge of where your money is going.
You can do this manually by checking your bank and credit card statements and adding the expenses to a spreadsheet. There are also financial apps that can automate the process. Be sure to include everything from rent and transportation to meals out and entertainment. You need a 100% accurate picture of your spending to make zero-based budgeting work. This is also the best way to uncover areas where you’re overspending and could cut back.
2. Break your expenses into logical categories
Armed with all your monthly expenses, it’s time to separate them into categories. This will add further details to the picture you’re creating of your spending habits. Common categories include:
- Investments and savings;
- Personal care;
With your categories in place, you can see how much you’re spending on them each month. This is crucial because it’s easy to be flippant about $5 here and $10 there. However, if you see, for example, that you’re spending $600 a month on eating out and going to bars, the magnitude of your spending habits becomes far clearer.
3. Establish short and long-term goals
Now that you know where your money is going, it’s time to set realistic goals. Sticking with the previous example, it may not be realistic to halve your entertainment spending right away. However, you could aim to reduce it by 10% and then work your way down. This kind of goal-setting gives you something to aim for while avoiding the risk of getting overwhelmed.
4. Make spending decisions based on your budget
With your goals for the month set, you can allocate funds to each of your categories. From here, it’s time to get on with your life while keeping your budget in the back of your mind. Check-in before making any spending decisions because once you’ve used up your allowance in one category, that’s it for the month.
To help yourself stick to the new system, it’s a good idea to automate the savings and investment side of things. With those funds safely tucked away, many people choose to withdraw their spending money for the month so they can allocate it to categorized envelopes. This approach gives you an instant snapshot of what you have available in each expense category.
5. Conduct regular reviews and make adjustments where needed
Your income and expenses will probably change over time, so it’s important to reflect this in your budget. Regular reviews will help you stay on track and achieve your financial goals.
Zero-based budgeting offers an effective way to take control of your finances. By tracking your spending, setting realistic goals, and reviewing and adjusting your budget, you’ll set yourself on a path to financial freedom.