by: holli casto
Zero Based Budgeting
Zero based budgeting is the most classic form of how to make a budget. This strategy accounts for every dollar you make, between your expenses, debt repayment, and your savings on a month-to-month basis. This method will put into perspective your spending and reveal areas you may be able to cut back. Whether this is a method that you can sustain in the long run or not, we strongly suggest most people start here because it puts into perspective how far your dollar goes in each category.
How to get started with Zero Based Budgeting
To start following a Zero Based Budget, follow these step-by-step instructions:
- Calculate Net Income: Begin by calculating your monthly net income. Also called your take-home pay, this is how much you earn, or your gross income, minus deductions such as taxes, insurance premiums, and retirement contributions.
- List and Categorize Expenses: List all your monthly expenses. Categorize them into fixed expenses and discretionary expenses. Fixed expenses are non-negotiable payments that you have, like rent or mortgage payments, utility bills, groceries, and minimum loan payments. Discretionary expenses are more flexible items like dining out and entertainment.
- Subtract Fixed Expenses from Net Income: Subtract all your fixed expenses from your net income. This will show you how much of your income is left for discretionary spending and savings.
- Decide how much you want to go toward discretionary spending: From the amount you have left from the difference between your income and your fixed expenses, decide how much can go toward discretionary spending. Prioritize the things you can't go without, and cut back in areas you know are frivolous.
- Decide what to do with the rest: Once you've allocated your spending money, you can make choices about your savings and debt repayment goals. Any extra money after all your expenses are paid should go toward either your savings accounts or debt payments. Decide how much you want to put towards what.
- Put your budget into action: Throughout the month, track every purchase you make and every bill you have. If you find you've allocated too much or too little to a certain category, adjust the allocations accordingly.
- Review Monthly: At the end of each month, review your spending, savings, and debt repayment against your plan. Analyze areas for improvement and adjust your next month’s budget accordingly.
