How to Use Zero Based Budgeting
Zero-based budgeting may sound a little radical or reckless, but there's more method than madness behind this new budgeting fad.
At its core, zero-based budgeting is your monthly income minus your monthly expenditures should equal zero. On the surface, that sounds like every dollar you earn should be spent every month, but that actually isn't the case. Zero-based budgeting does put every dollar to work, but not necessarily on spending.
Zero-based budgeting takes what you earn in a month and allots the money to different categories. For example, if you make two thousand dollars a month, you would divide that two grand into pre-determined categories until every dollar had a job. Some of those categories, like grocery, would be spending. Some of the categories, like savings, would not be spending categories—but the money would still have a specific job to do.
How to Set It Up
Start by examining your expenses. Look through your last few months of bank statements and bills and see if you can paint a clear picture of exactly where your money goes each month. If you don't have any clear spending trends, now is a good time to buckle up and set a few ground rules for yourself. This may also be a good time to examine those spending habits in general. Everyone has waste in their budget, but now is a good time to eliminate that waste.
Once you know where your money is going, divide your spending into categories. Maybe start with the necessary categories and then add in some of the non-essential spendings. Be sure to consider things like reoccurring bills, monthly subscriptions and memberships, rent/mortgage, groceries, savings, and projects you're working your way toward.
It's also important to know your take-home income, not just your salary. If you make two thousand dollars a month but only bring home one thousand five hundred after taxes, that's the number you should be working with.
If your takehome after taxes is two grand, start dividing up with that number. For example, you could set the following aside: one thousand for rent/mortgage, three hundred for groceries, three hundred for reoccurring bills and utilities, one hundred for savings, one hundred for a vacation savings fund, and two hundred for insurance.
Obviously, this is a simplified version of this budgeting method, but you get the gist. Take your monthly take-home and then begin subtracting expense categories until you hit zero.
Your budget categories do not have to be the same every month. If, for example, you are saving for a vacation and you go on that vacation, you may have some extra money waiting to be assigned at the end of the next month. Don't let it just sit there. Give you money a job. Set it aside for investments or a DIY project, or add it to your savings category.
Unlike other budgets, this budget is super flexible and can be altered to work for you.
If you have a joint income, both parties will need to be on board and fully commit to this budget to work for the combined household. When only one person uses this method, the necessary spending may become unequal. The exception to this rule is when you live with several individuals, like in a dorm, where the shared costs are already set and equally divided.
Jumping into a budget can be a little overwhelming, but it's always worth it. Budgeting is the first step to financial freedom. If zero-based budgeting isn't your style, you can still DIY on a budget. From flipping a kitchen on a dime to planning for your next big DIY, there's a budget out there for every DIYer.