Zero Based Budgeting
June 18, 2018A budget is the most important aspect of your finances. Whether you make $20K a year or $200K; you need to have a plan for your money. If your personal finances were a business and you didn’t keep track of your annual income and expenses, you’d have to close up shop pretty soon. There are dozens of budgeting methods and, in truth, one is not better than the other. The budget you choose is a matter of preference, and as long as you stick to it, you can theoretically reach any financial goal you could conjure up. Let’s take a look at zero based budgeting and if it is the right budget for you.
If you’re like most recent grads, you’re still getting a handle on your finances, likely juggling student loan payments, low starting salary, and a few vague ideas of what you’d like to see in your financial future. As such, many shy away from a budget, believing their financial troubles to be out of sight, out of mind. Unfortunately, money doesn’t work this way, and if you don’t take control of it, it will almost certainly take control of you.
Zero Based Budgeting
Because mindless spending is such a common pitfall, the Zero-Based Budgeting method has become widely used. The point of zero-based budgeting is to assign every dollar of your income with a task so that you avoid careless spending. In theory, if you have a comprehensive budget that accounts for everything BEFORE each month begins, you shouldn’t have any cash left over to waste throughout the month.
When you look at your monthly income, you should have a very finite number to work with. Acting like it’s an arbitrary number is the same thing as saying you have about 24 hours in a day. You have exactly 24 hours in your day, and you have exactly X amount of income every month. How you choose to spend those hours is completely up to you and the possibilities are limitless, just like your finances.
The zero-based budget balances a diligent tracking of last month’s expenses with a mindful forecast for next month’s. Because it takes some thorough crafting, you shouldn’t expect to nail this in your first couple months, nor should you anticipate it being a one-and-done deal. By design, it will need to be flexible, like extra cash for your A/C bill in the summer or holiday gifts at the end of the year.
Name every dollar
You have to give a name to every dollar coming in the door so that it has a specific purpose when it goes out the door. If you can’t, that’s a great indication of where your mindless spending is. If you’ve accounted for every foreseeable cost and still have a couple hundred bucks floating around aimlessly, add them to your emergency fund or investment portfolio. Shave $100 off your electricity bill in the spring? Stash it away in your holiday fund for a colder day. Find $20 on the street? Ok, that’s pretty rare so you’re off the hook on this one.
Think before you swipe
Look, the point is – be mindful with your money. You’re smart. You’ve lived enough life to know your spending habits, and sure, maybe you have some bad ones here and there. But ignoring them is not going to make them disappear. That’s why enlisting a proper budget will draw attention to the problem areas and empowers an opportunity for change.