The Easy Step-by-Step Guide To Zero-Based Budgets
You may have heard about zero-based budgets before but you keep wondering what it’s all about. Luckily for you, you’ve come to the right article which will give you an easy, concise and step-by-step guide to everything there is to do with zero-based budgets.
What Is It?
Put simply, a zero-based budget is one where your total income minus your total expenses equals 0. In other words, it’s a balanced budget. The objective is to plan to spend your entire monthly income before actually going out to spend it.
Steps To Take
Just use the following steps to construct your own zero-based budget:
1. Identify Sources of Income For The Month – This may be just a paycheck from your day-to-day job or from an investment/business. If you still have not received a paycheck you can simply use your bank account balance. It’s also better to use your net income rather than your gross income in a zero-based budget.
2. Identify Sources of Expenses – List all the expenses you expect to make during the next month. It’s unlikely you will come up with all the expenses so in order to take this into account, assign a certain amount of money to a miscellaneous category.
3. Allocate Expenses According To Fixed, Semi-Fixed or Variable – Put all the expenses you came up with in step 2 in 3 categories: fixed, semi-fixed, variable. When it comes to expenses that are paid on a yearly basis such as car registration, simply divide that amount by the number of months remaining before payment is due.
4. Calculate The Difference – Now that you have identified your sources of income and expenses, subtract your expenses from your income.
5. Adjust To Parity – It’s unlikely that the difference will be 0. If it is a positive difference, this means that you have more money to spend. On the other hand you can save this money for a future vacation or something else. If it is a negative difference, this means that expenses must be cut so the difference reaches zero. This involves cutting unnecessary expenses.
Hopefully this article has given you a good introduction and helpful information on zero-based budgets to help you manage and plan your finances better.