The Zero-Based Budget
A Zero-Based Budget or “zero balance budget” forces you to justify each expense by assigning a dollar amount to every move you make with your money. That is to say, your income minus your expenses, equals zero. Radio host and financial advisor Dave Ramsey explains, “If you cover all of your expenses during the month and you have $500 left over, you aren’t done with the budget yet”. Although Ramsey speaks of the zero based budget in terms of monthly spending, I prefer to budget twice a month since I have irregular income. You know exactly where your money is going, it leaves no room for overspending, and it is based on your current needs, which are clear advantages to this type of budget.
I used to write down every expense to get an overview of how I spend money. It was good because I was able to see patterns in my spending that I was unaware of. Outside of being a very tedious task of tracking every expense (pre-smart phone apps), doing this sort of overview only happened AFTER I have already spent the money. Nowadays, I take a more proactive overview of my finances and I spend my income on paper BEFORE I spend a dime in reality by using a zero-based budget.
How to Make a Zero-Based Budget Work for YOU!
Sure there’s computer based software for budgeting, but I find a simple pleasure of the good ole’ pen to paper method. It’s my personal preference but in order for you to be diligent in your effort, you should choose whatever makes you most comfortable. Got your tools? Let’s go!
- Record your income after taxes (monthly or bi weekly).
- Rank your outgoing expenses in order of importance. I don’t include my bills in my ranking of expenses because I pay those first and foremost. After a dollar amount is assigned to each bill, I know how much I have left for the other expenses from groceries to travel fund and gasoline to retirement savings. When budgeting your money, you have to remember to prioritize for things that bring you JOY; otherwise, the zero-based budget or any other type of budget will be viewed as a chore instead of a building block on the road to financial freedom.
- Assign a dollar amount to each expense.
- Add it up! If you have leftover money, you should consider applying that money toward debt or savings. If you are in the negative, go back and readjust your figures. If you don’t justify that leftover money, Ramsey maintains, “you will lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth”.
- Spend in cash. Whatever can’t be paid through your online bill pay should be paid in cash. You will have zero credit card debt and when it’s gone it’s gone.
- Celebrate your successes. Did this type of budget help you reach a financial goal? Take a moment and revel in your accomplishment. It will keep you motivated to hit your next financial milestone and get your closer to living financially free.