A zero-based budget is where your income minus your expenses equal zero dollars. Zero-based budgeting does not mean that you have zero dollars in your bank account at the end of the month. Every dollar that is coming into your account for the month needs to be given a task. Because you assigned the required dollars to a task, at the end of the month you aren’t trying to find some money to buy food or to pay your mortgage.
In your zero-based budget you have your income and your expenses. Your expenses can be broken down into five groupings and prioritized in this order: Charitable contributions, your current needs, your future needs, debts, and your wants. Don’t get these out of order, and don’t confuse them with each other. Don’t place your wants before the other groups, and don’t confuse your wants with your needs. When you have your budget categories prioritized correctly, you can build wealth.
List Your Income
You create your budget before the month begins. Start by listing your income. This is your take-home pay. You have your income, your spouse’s income, maybe income from a second job, investment income, social security income, and other types of income. Add it all up for the month, and these are the dollars that you need to give work to.
Expenses: Charitable Contributions
After your income you list your expenses. Start with charitable contributions. Some of you are going to skip this category, and that’s up to you. Some of you are so far in debt you don’t have anything to give. That’s fine for now. One reason to get out of debt and build wealth is so that you can give money away. You might have to skip this category for now. I am not going to suggest how much money you give to your church and other charities. You can give as much money away as you like.
Expenses: Current Needs
Next, list your current needs. Your mortgage, food, and transportation are the three most important needs. You don’t want to be living on the street or have no food or no way to get to work. After those, you have things like clothes, utilities, insurances, internet, phone service, and miscellaneous. Don’t forget the miscellaneous category. Even if you pay your auto insurance once a year, you still need to budget each month for it. This will ensure that you have the money available when the time comes to pay your premium. This is not an all-encompassing list, and some of those items are needs, but a higher cost version is a want. A basic phone is a need; the latest iPhone is a want. A vehicle that gets you to work is a need. A new vehicle is a want.
Expenses: Future Needs
After your needs, you list your future needs. Future needs are items you must spend money on in the future that you know are coming. If you live in a state where your vehicle registration is high, then budget for it each month. If you think your current car is going to last six more months, then budget for the next one. Figure out how much you need for the next vehicle and divide by six if you need a different vehicle in six months. A wedding is something you know is coming. Start budgeting for your wedding as soon as you know you are getting married. Determine how much you are going to spend on your wedding and divide that by the number of months you have until the big day. This is the amount you need to budget each month in order to pay cash for your wedding.
If you have debts, then some of the items in the previous categories need to be revisited. If you and your fiancé are drowning in debt, then you need to consider spending less on your wedding. Your food budget and phone service need to be looked at if you have debt. Getting rid of your debt needs to be your priority because debt will have an effect on other budget items. You know what to do here. Debt snowball. Pay the minimums on all your debts, and then list your debts from smallest to largest and pay extra on the smallest debt.
If you have extra income after you are paying off your debts, you can spend some on your wants. This includes current wants like restaurants and fun activities, but it also includes future wants like vacations, birthdays and Christmas, and the latest iPhone if you think you need that. It’s a want, but if you want to spend your money on that, then budget for it. If you are going to take a cruise one year from now and it’s going to cost you $2,400, then you need to budget $200 each month for the next year.
After you are done determining what you are going to spend your money on for the coming month and if you still have additional dollars to complete your zero-based budget, then I recommend you save them for retirement or pay off your house faster. If you have debt, then work your debt snowball with those extra dollars.
Execute Your Budget With Intentionality
Once your budget is completed and the month starts, you track each transaction and make sure you are following your budget. You were very intentional when creating your budget, so now is not the time to become unintentional with your money. Stick to your budget throughout the month and keep track of your spending. Don’t overspend on categories. This will cause problems with other items in the budget. If something causes you to not spend as much as you had planned for an item, then you can allocate this money to another item. Don’t overspend, be intentional, and you will do well.
Having a zero-based budget is good if you have a consistent income. You know what you will bring home each month, so it’s easy to know how much money you can spend. A zero-based budget can also be used if you have an irregular income, but you will need to estimate what your income will be for the month. Your zero-based budget causes you to be intentional with your money and being intentional causes you to build wealth. Remember, list all your income for the month, and then list your expenses in the prioritized order above. Know the difference between your wants and your needs.