What is a zero-based budget?
Many people want to win with money, but don’t know how to do just that. A lot of times people look at income to be the sole factor in growing wealth and living a financially successful life. While income does play a role in personal finance, one has to learn how to make that income work for them (and I don’t mean fit into their lifestyle, but truly have each dollar work to be a part of the plan). In other words, income is just the beginning, while a budget is the catalyst that takes your income farther than you could ever imagine. Let’s look at one form of budgeting: a zero-based budget.
Don’t freak out! It can seem crazy to see the word “zero” and “budget” in the same sentence, but that’s the secret sauce in this type of budget. Simply put, you take the total income that you are planning to receive within a given amount of time (most times we look at budgets on a month-by-month basis), and make sure that every single dollar earned is recorded in a particular category within your budget. Let’s say that you are planning on making a total of $4,000 next month. In a zero-based budget, you would be sure to account for a total of 4,000 individual dollars throughout all the categories that you need/have in your budget. This, ultimately, would bring your total budget to zero at the end of the month. Confused? Let’s break it down a little more.
As we mentioned in our scenario above, let’s say you make $4,000 per month. Your budget might look like this:
Income: $4,000
Giving: $400
Saving: $400
Rent: $1,500
Utilities: $200
Groceries: $300
Transportation: $300
Insurances: $400
Cable: $50
Cell phone plan: $150
Entertainment: $300
Total left in budget: $0
Although the budget above is simplified for times-sake, notice how every category above equals out to the total income earned for the month, which is $4,000. What you don’t see is your savings category at $200 in order to give yourself a $200 buffer for random purchases.
Why is that? Why wouldn’t we want a buffer in our budget? The answer is simple. Most people, when given an inch, take a mile. A $200 buffer in your budget means you get to spend $200 per month without thinking about the future effects of that purchase. It means that when you see that awesome grill at your local hardware store and begin to think of the dinner you could make, you purchase without a questioning thought. Or when you find that pair of shoes that you’ve always wanted, you purchase knowing it won’t affect the bottom line. This care-free spending can multiply and next thing you know, you’ll be putting money on a credit card to buy purchases that you do not need. You’ll be pulling money from your savings category to make purchases that won’t get you to your financial goals that you set. While spontaneity is good is some circumstances, keeping a zero-based budget is critical to keep yourself on track for your financial goals.
Take into account that every individual month is going to be different than previous months. Some months you will have an additional paycheck. Other months you will have categories that you didn’t in the previous month due to varying seasons (for example, one month you may have a family birthday you need to save for that you won’t have in your budget the next month). Taking a zero-based budget and working it for the month coming up is critical to being successful in your personal finance endeavors. A budget should be fluid and be able to flow with the month in which you’re working your budget.
Finally, let me give you grace when it comes to starting this adventure of zero-based budgeting. It’s going to take a month or two of tweaking your budget before you become confident in your numbers. Take this time to learn about your spending habits and your behaviors when it comes to money, and you will find that being on a budget is not limiting, it’s truly rewarding.
If you are interested in beginning your financial journey with a financial coach, please visit www.scouchenour.wixsite.com/nashfinancial. From working a zero-based budget to getting out of debt, Nash Financial Coaching will equip you with the knowledge and hold you accountable to reach your greatest potential. We understand that personal finance is, in fact, personal. And we are here to help walk beside you in your journey. Check us out!
