If you’re looking to get your finances on track this year, you need to have a budget. In my opinion, budgeting is the most important step towards getting control over your money. Today I’m going over the 6 Zero Based Budgeting steps that will help you get back on tack.
A Zero Based Budget isn’t the only budgeting method you can use. To learn about the top methods, read my related article:
What is the Zero Based Budget
Under the Zero Based Budgeting method every dollar is accounted for. This is a great budgeting tool if you want to know exactly where all of your money is going. This method can take some time to prepare however it’s a highly effective way at managing your money.
Zero based budgeting is so effective because it’s highly personalized and unique to you. The Zero based budget follows the following formula:
Income – Expenses – Debt – Savings = $0
Essentially, you are accounting for every single dollar of your income so that you have $0 left to account for. This helps you get control over your expenses and reach your financial goals.
A zero based budget must be created monthly and adjusted as your finances evolve. It’s important to consistently be updating your budget as your financial situation changes so it remains accurate. Your expenses and income might not always remain the same, therefore creating a monthly budget can help you stay on track.
6 Zero Based Budgeting Steps
Today I’m going through the 6 zero based budgeting steps to help you create a detailed budget. It’s important to follow all 6 so your budget remains accurate.
Step 1: Calculate your monthly income
The first step is to calculate your monthly income. When doing this make sure you account for all revenue you make during the month. You can either include all of your income into one line item or break it out by type (I prefer the latter).
Your total monthly income must include everything you bring into your bank account, including any sort of side income or support payments you receive. It’s important that you include everything into your budget.
Step 2: Budget in your Expenses
Next you need to budget in your expenses. Each expense should have a separate line item on your budget. Make sure you include all of your expenditures. Here are some tips to use:
1) Start with reoccuring expenses
These are the expenses you have month over month. They include things like food, rent, utilities, transportation, entertainment etc. All of the big expenses you have monthly. Take a look at credit card bills and bank statements to get an idea of how much you spend on these.
2) Take into account seasonal expenses
Seasonal expenses can be tricky. That’s why it’s important to include them in your monthly budget. I don’t know about you but I’ve gone overboard at Christmas in the past. That’s why accounting for these in your budget are so important. Think of things like:
Holidays, birthdays, anniversaries
Also remember, you might want to save up for some of these seasonal expenses in advance. For example if there’s a birthday in 3 months and you are going to spend $300 on the present, think of budgeting $100 per month leading up to the purchase.
3) Have a Miscellaneous category
Your expenses won’t always be the same every month. Life happens, unexpected expenses arise so it’s recommended to have a miscellaneous category to catch these types of expenditures. Review your prior month miscellaneous expenses to get an idea of how much to budget for.
4) Build an emergency fund
This is a personal choice but one I always like to remind people of. If you don’t have an emergency fund, I recommend you start one. An easy way to do this is put an emergency fund line in your budget and build it month over month until your balance is satisfactory. At which point you can remove this line out of your budget, unless you use the balance on an emergency.
Step 3: Incorporate Debt Repayment Requirements
If you have any sort of monthly debt repayment requirements this needs to be a unique line item in your budget. This could include but isn’t limited to:
Mortgage repayment, Car repayments, credit debt repayment, bank loans, interest payments, etc.
I personally like to keep these separate from expenses because debt repayment is extremely important. If you have debt, paying it off should be a priority.
Step 4: Incorporate Savings Goals
This comes last. If you have money left over and are trying to meet savings goals than set aside money each month for them. This can come in a variety of forms. Maybe you’re saving up for a new car, or a child’s school fund. Whatever it is it should be separated from the rest of the budget.
Step 5: Try the Zero Based Budget Formula
Once you have come up with your income, expenses, debt repayment and savings you need to total each category and try the Zero Based Budget Formula:
Income – Expenses – Debt – Savings = $0
Remember your ending balance must equal $0.
If you have a negative Balance
If you have a negative balance it means you’re spending more than you’re bring in each month. Take a look at your expenses first and see if there’s any areas you can cut back in. Try focusing on entertainment and miscellaneous.
If you have a positive balance
If you have a positive balance it means you have money too allocate. First look to debt repayment, especially if you have a high interest rate on that debt. The additional money should be put towards paying that off.
Next, focus on savings. Whether you’re saving up for retirement or a large purchase the additional cash can go towards a saving line item.
Wherever you put the additional cash, make sure it add it into your budget so it’s accounted for. Remember your formula needs to equal $0 so that all of your money is incorporated into your budget.
Step 6: Compare Actuals to your Zero Based budget
Now the fun part. Throughout the month you need to keep track of what you actually spend against your budget to make sure you’re on track. This will do two things for you:
1) It forces you to take responsibility over your spending
Once you start tracking your money you will start to be more intentional with your spending. Throughout the month, track your expenses against your budget to make sure you stay on track. You might start to notice areas you can cut back on.
2) It will increase your money confidence
Tracking your money gives you more confidence because you have more control. Taking control over your finances is the first step to getting a handle on your finance situation. This in turn will lead to better spending decisions.
I hope this gives you an easy step by step process to follow when creating a zero based budget. All of the zero based budgeting steps can see daunting at first but after a month or two it becomes routine.
Budgeting is a great way to get more control over your spending and financial decision making. Let me know in the comments if you decide to try out the Zero based budget!